Loan Basics

There is more than one type of loan. Depending upon your situation, you might find that what works in one circumstance does not work in another. This means that it is very important for you to educate yourself about different kinds of loans so that you are more prepared when you speak with a lending officer, or with a financial counselor. It is especially important that you understand what the different sorts of loans entail so that you are not pushed into making a wrong decision by a lender that is more interested in a percentage rather than your financial well being.

Understanding the difference between a secured loan and an unsecured loan.

At their very basic, loans come in two kinds: secured and unsecured. Whether you are looking into business loans or personal loans, they will either be secured or unsecured. Credit cards, which are basically consumer loans, are also denoted with these names. However, you will find that most credit cards are unsecured, unless they have a very high limit.

A secured personal loan is one that requires a form of collateral. Collateral is something of value that the lender can possess if you fail to meet your obligations. A home loan is a secured loan. If you default, then the lender can take your home to cover its costs. Auto loans and car title loans are other examples of this. It is also possible, for smaller loans, to offer valuable jewelry or electronic equipment as proof that you will pay back the money you borrow. However, it needs to be something that the lender feels it can use to recover its loss should you default. If you are seeking a bad credit loan, more than likely you will have to put forth some collateral. When you have less than favorable credit, you are immediately seen as a higher risk, and therefore must offer something to justify the risk the lender acquires in allowing you to borrow money.

Unsecured loans are the opposite. They require no collateral. As mentioned previously, credit cards are a form unsecured loans. Many banks offer small signature loans. These are usually loans of between $500 and $3,000. Most unsecured debt comes in smaller amounts. This is because if you stop making payments, the lender loses what you have been lent. They can turn you over to collections, and can call demanding payment, but, ultimately, if you have no money and cannot pay, the lender loses out. However, the cost to you is also great. Your credit is effectively destroyed, making it next to impossible for you to get a mortgage in the future. It can even hamper your chances of receiving approval for an auto loan or a credit card.

Any loans you take out, whether they are secured or unsecured, are reflected in your credit report. It is important to establish a pattern of responsibility fulfilling your obligations in full, and in a timely manner.

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