Secure Vs Unsecured Loans

Essentially, there are two types of loans: secured loans and
unsecured loans Secured loans are loans in which you pledge
some sort of collateral The bank may repossess the collateral
if you do not repay the loan according to the terms you agreed
to when you took out the loan
Unsecured loans are not backed by any collateral You borrow
money on the strength of your good credit and ability to repay
alone
Revolving vs Installment Loans
Revolving and installment describe the amount of time you have
to pay back a loan With a revolving loan, you have access to a
continuous source of credit, up to your credit limit You repay
only the amount of the credit you use, plus interest on the
unpaid amount You may re-borrow the principal you’ve repaid So
the loan could remain “open” for years
With an installment loan, you pay an agreed amount, which
includes principal and interest, every month Each payment
reduces the balance of the loan until it is paid off There is a
fixed ending date, known as the term of the loan
Fixed vs Adjustable Interest Rate Loans
Fixed interest is just that You and the bank agree to a certain
interest rate and it remains constant throughout the term of the
loan Fixed interest rates give you the stability of always
knowing what your payment will be, so you can budget
accordingly
Adjustable or variable rate interest fluctuates Usually it is
pegged to the Prime Rate – the interest the US Treasury
charges to its best borrowers When the Prime Rate is high, such
as during a period of inflation, you pay more When the Prime
Rate is low, such as when the government is trying to stimulate
the economy during a recession, you save on interest If you
need to borrow during a period of high interest, your payments
will drop once the Prime Rate drops
Types Of Loans
Auto Loans: A secured loan in which the collateral is the
vehicle you purchase
Credit Cards: An unsecured loan which allows you a line of
credit against which you may borrow by presenting a plastic card
to the merchant from whom you are purchasing the item You may
make more than one purchase, up to your credit limit
Personal Loans: Secured or unsecured loans made for a fixed
purpose
Mortgages: A secured loan in which the collateral is the real
estate you buy
Home Equity Loan: A secured loan for a fixed amount in which the
collateral is your home In some cases, the interest on this
loan may be tax deductible See your accountant
Home Equity Credit Line: A secured, revolving line of credit in
which the collateral is your home In some cases, the interest
on this loan or a portion of it may be tax deductible Consult a
tax professional or your accountant
Home Improvement Loan: A secured loan for a lump sum fixed
amount in which the collateral is your home The money may only
be spent on home improvements The interest on this loan may be
tax deductible Consult a tax professional or your accountant
(In some areas of the country, a home improvement loan “secured
by the equity in your home” may not be available In these
areas, an unsecured home improvement loan would be available)
Student Loan (Stafford Loan) A loan for college expenses
underwritten by the US Government The loan is granted to the
student Payment is deferred while the student is still in
school
Personal Line of Credit: Unsecured loans allowing you access to
funds up to a fixed credit limit

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