Just about everyone will have to borrow money at some point. Few people actually enjoy paying interest, but it can become necessary for most people at some point in their lives. When it comes to classifying loans, there are two major categories that can come into play. There are unsecured loans and those that are secured.
An unsecured loan does not have any collateral to secure it. Therefore, this type of loan is a bigger risk for lenders. Because of the heightened risk, those looking for an advance loan or similar product will need to show proof of income. They also tend to come with higher interest rates compared to loans backed by some kind of asset.
One of the more common types of unsecured loans is the personal cash loan. These are generally taken out when individuals or families have cash flow issues. Borrowers can borrow money for a short period of time by promising to pay the money back after their next payday and paying a fee. Borrowers must usually pay these loans off in full, or they will need a new loan or a series of loans with a new fee until they can.
Another form of unsecured loan is a credit card. One of the reasons that credit cards tend to have high-interest rates is because of their unsecured nature. Of course, loans via credit cards tend to require their borrowers to have relatively high credit scores before the lending institution will issue credit.
Student loans are also considered to be an unsecured loan product. They do not require collateral. However, a student loan will generally have a lower interest rate than an advance loan or a credit card. This owes to the fact that many student loans are subsidized by the federal government. Private student loans from banks or other lending institutions will have higher interest rates than government loans, but the vast majority of student loans are unsecured.
Secured loans have collateral backing them. Generally, the collateral will be the item purchased with the loan. Two major forms of secured loans are mortgages and auto loans.
Those looking to get a home loan will have to go through a relatively lengthy application process. This application will require a credit check which will look into a prospective borrower’s credit history and credit score. The collateral that will back the loan is the house itself. A home loan will come with an interest rate that’s tied to the bank’s perception of the borrower’s ability to pay.
Getting a car loan is a bit less cumbersome than getting a mortgage loan. There is still an application and a credit check, but an auto loan will usually be a smaller loan than a mortgage. Many auto dealers can set up a loan for borrowers through a lending institution, but individuals can also go to their local bank or credit union to apply for a loan. The collateral for an auto loan will be the car or the truck that’s purchased, and if the borrower does not pay on time, the bank can hire someone to legally repossess the vehicle.
While there are both secured and unsecured loans, these different loans serve different purposes. Unsecured loans are usually required for consumer goods or day-to-day living expenses when cash flow is tight. Secured loans, on the other hand, generally allow borrowers to make larger purchases on homes or vehicles. The purchase actually serves to secure the loan and will get repossessed if the borrower does not pay the loan back in a timely fashion.