Different Types of Loans

Different Types of Loans

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All loans, no matter what they are, are either secured or unsecured. Knowing the difference can better help you understand how they work and what to expect when applying for one. Secured Loans A secured loan is one that relies on an asset, such as a home or car, as collateral for the loan. In the event of loan default, the lender can take possession of the asset (foreclose on a home or repossess a car, for example) and sell it to recover the amount of money loaned. For this reason, interest rates for secured loans are often lower than those for unsecured loans. In many cases, such as in the purchase of a home, the asset to be used as the collateral will need to be appraised before the terms of the loan can be set. Examples of secured loans are: • Car loans • Boat (and other recreational vehicle) loans • Mortgages • Construction loans • Home equity loans • Home equity lines of credit Unsecured Loans Unsecured loans do not require the borrower to put forth an asset for collateral. The lender relies solely on the borrower’s credit history and income to qualify him for the loan. If the borrower defaults, the lender usually has to try to collect the unpaid balance through a variety of efforts which may include using collection agencies, freezing accounts, lawsuits, and garnishing wages. Because there is a considerably higher assumption of risk on the lender’s part with an unsecured loan, the interest rate is usually much higher. They are often more difficult to obtain and the amounts loaned are usually lower than that for secured loans. Examples of Unsecured Loans are:

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