Unsecured vs Secured Loans

When you begin looking into personal loans you’ll quickly learn that there are different ways to borrow money for all kinds of things that you need money for. The two basic kinds of loans are often categorized as “secured” and “unsecured” loans.

Unsecured loans are good for smaller purchases which you can pay off quickly. Unsecured loans are loans 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’ve 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 type of financing.

When you finance a car or buy a house with a mortgage (which is a kind of secured loan) the bank technically owns what you bought until you’ve paid off the debt amount plus interest. Secured loans are a type of loan in which the lending institution has some sort of collateral or payment to hold until you pay off the loan. If you default on your loan then the lending institution can take your collateral and auction it in an effort to regain some of the money they lent you.

Depending on your tax situation you may even be able to reduce the income tax that you owe. There is often more paperwork associated with secured loans because they are so much bigger than most unsecured loans. Common secured loans include house mortgages, new auto loans and most current house remodeling loans. Secured financing such as home equity lines of credit generally have a lower interest rate, which makes paying them off less expensive over the life of the loan.

No matter what type of loan you consider remember that you do have to pay the money back and you will be paying interest on the amount that is owed. Plan ahead and be sure you can really afford the monthly payments before you go forward with your loan. Many costly projects are revised when people finally begin to consider how various loans work.

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