The two general kinds of loans are often categorized as “secured” and “unsecured” loans. There are various other types of methods for borrowing cash but all those different loan vehicles can actually be categorized into one of these two classes. When you start researching personal loans you’ll quickly learn that there are different ways to borrow cash for all sorts of things that you need money for.
Unsecured loans are financing vehicles which are given to you based on your credit rating and not based on any single thing you offer up for collateral. Your credit score is really a measure of your past ability to pay off what you’ve owed in the past. If you have always paid your debts on time then you probably have a pretty good credit rating. Most credit cards are really considered to be an unsecured loan. Unsecured loans are good for small purchases which you can pay off quickly. Even store credit cards are good to use in some cases because the credit limits are small and the introductory interest rates are often decent.
Secured loans are a kind of loan in which the bank has some sort of collateral or payment to hold until you pay off the debt. When you finance a boat or buy a house with a mortgage the bank technically owns what you bought until you’ve paid off the debt amount plus interest. If you don’t pay off your loan then the lender can take your collateral and sell it in an effort to regain some of the cash they lent you.
Secured loans such as home equity loans generally have a lower interest rate, which makes paying them off less expensive over the long run. There is often more paperwork associated with secured loans because they are so much larger than most unsecured loans. Depending on your tax situation you may even be able to lower the yearly income tax that you owe. Common secured loans include home mortgages, new auto loans and many major home remodeling financing options.
No matter what type of financing you consider remember that you do have to pay the money back and you will be paying interest on the money that is owed. Be smart and make sure you can really afford the regular payments before you go forward with your loan. Many expensive plans are changed when people finally begin to understand how various loans work.
Want to read more about the basics of home loans? We can help answer the complex questions about refinancing a home loan or how to deal with an upside down mortgage.