When you want to cover a large expense such as a house, car, education tuition or home repairs, the best option is often to choose to take out a loan. Most people, however, know very little about loans at all. There are a number of different types of loans and the one you choose should suit your needs and fiscal abilities.
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Loan Types
In addition to knowing the basic terminology related to loans, it is important to have an understanding of what loans are available. There are two main types of loans: secured and unsecured. Secured Loan
A secured loan is one that uses the assets (belongings) of the borrower to ensure the repayment of the loan. In borrowing money against, for example, your home or car, the lender has less risk of you reneging on your commitment to repay. Should you fail to repay the loan or have too many delays in payments, the lender has the contractual right to your property. That ’s right, they own your belongings until you repay the full amount of the loan and interest.
Getting a secured loan is a great idea when you:
- Have bad credit and cannot get an unsecured loan
- Have a bad credit history
- For whatever reason you are unable to be approved for an unsecured loan
Pros & Cons of a Secured Loans
Pros
- Fast approval based on your property ownership
- Lower interest rate
- Borrow at the value of your property
- Extended period for repayment
Cons
- You are at risk of losing your property
- Having to pay back the loan
Unsecured Loans
An unsecured loan is one that is given to the borrowers based on their credit history. This type of loan requires no assets as a form of backing and guarantee that you will repay the loan. The better credit history you have, the more likely you are to receive an unsecured loan. In some cases you need to have stellar credit history; that depends on the financial institution from which you choose to borrow. Unsecured loans come in the form of credit cards, bank overdrafts, corporate bonds and personal loans. Which type you are eligible for depends on the lender and your credit history. There are some forms, like credit cards, that work to improve your credit history and others that are approved only when you have a positive history. Pros & Cons of Unsecured Loans
Pros
- Little risk to your property
- Multiple types of credit available
Cons
- Extended period of time for approval
- Loan amounts tend to be smaller
- Interest rates tend to be larger.
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