There are many other types of methods for borrowing cash but all those different loan vehicles can actually be categorized into a “secured” or “unsecured” loan. These are the only two basic kinds of loans that exist for any borrower. Knowing the difference is important if you want to be smart when it comes to your finances. When you start looking into personal financing options you’ll quickly learn that there are different ways to borrow money for all sorts of things that you need money for.
Unsecured loans are financing vehicles which are given to you based on your credit score and not based on any single possession you offer up for collateral. Your credit score is really a measure of your expected ability to pay off debts. If you have always paid your bills on time then you probably have a pretty good credit rating. Most credit cards are usually considered to be an unsecured type of financing. 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 low 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 car or buy a house with a mortgage the bank technically owns what you bought until you’ve paid off the loan amount with interest. If you don’t pay off your loan then the lender can take your collateral and auction it in an effort to regain some of the cash they lent you.
Secured loans such as mortgages generally have a lower interest rate, which makes paying them off easier over the life of the loan. 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 house mortgages, new auto loans and many major home improvement loans.
Many costly plans are revised when people finally begin to consider how various loans work. No matter what type of financing you consider don’t forget that you do have to pay the money back and you will be paying interest on the amount that is owed. Be careful and be sure you can really afford the monthly payments before you go forward with your loan.