All types of loans can be categorized as either a secured or an unsecured loan. Whether you’re looking to buy a car, make home improvements or applying for a payday loan, almost everyone, at some point in their lives will need a loan of some sort. But before you begin the process of applying for a loan, it’s important to know the basics.
Secured Loans
Secured loans are secured against an asset you own, for example, a loan that is borrowed against your home. In this case, the home would be used as collateral so if you default, the bank can foreclose your home and ultimately get their money back (also known as a seizing of the collateral).
People with a good credit score will have more room to negotiate the interest rate of a secured loan. They also have more bargaining power over the loan amount and length of the repayment period.
Car loans and recreational vehicle loans (such as a boat) are considered secured loans. Mortgages are also secured, as are home equity loans and home equity lines of credit. People often apply for home equity lines of credit when they are making home improvements because they have ongoing access to the funds whenever they need it. Home equity loans are great for debt consolidation because there is usually a fixed interest rate.
Unsecured Loans
In contrast to secured loans, unsecured loans are not secured against the assets of the borrower. Since there is no collateral, if you default, usually the lender can only send payments to collections or freeze your accounts. If borrowing from a bank, credit score and history are important in determining the loan amount and they will also scrutinize income, assets and current debts before approving a loan. Since there is a substantial risk increase with unsecured loans, the loan is likely to have a much higher interest rate.
Short term cash loans, such as the ones Money Mutual’s network of participating lenders provide, are unsecured loans with a fixed interest rate. These short term cash loans also don’t require you to have a perfect credit score.
Other types of unsecured loans include Personal lines of credit, where the borrower is given a specific balance amount (much like a credit card). Once in place, you can borrow as much as you need each month up to the line of credit maximum. There are also student loans for people needing to pay for tuition, books and other school necessities. Credit cards are another example of an unsecured loan where there is no collateral and generally a higher interest rate.
