If you looking into the world of credit and loans, you may be surprised at the different types of credit that can be extended to you, and that credit is extended in the form of a loan. However, there are many different types of loans.
Loans Fall Into Two Different Categories
In discussing the various types of loans or credit that can be extended to us as borrowers, it can be simplified down to two main categories:
- Secured: loans that are secured by some tangible object, the loan has collateral attached to it. This collateral secures the loan, and should the borrower not repay the loan, the lender has recourse to repossess the item that is the collateral. Good examples of this are car loans and mortgages, to buy a property. If you don’t pay, they can take the secured item away.
- Unsecured: Unsecured loans are just as they sound, loans with no collateral, nothing is securing the loan. If the borrower does not make the agreed payments, the lender has recourse to collect the account, but there is nothing they can repossess; there is no collateral or item securing the loan.
As you can see and imagine, secured loans are less of a risk to lenders. Borrowers are more likely to repay the loan due to the risk of losing their car, house, or whatever is pledged or used to secure the loan.
Unsecured credit or loans are much more of a risk to lenders, and as such, usually carry a higher interest rate.
Remember the higher the risk to the lender, the higher the interest rate can be.
High risk loan = higher interest rate.
Various Types of Loans
As we mentioned, loans fall into two (2) categories, secured and unsecured.
Here are a few examples of both:
- Mortgages: loans to buy a house or property, where the property secures the loan.
- Car loans: not all car loans are secured, but many of the finance options for vehicles can be secured by the vehicle itself.
- Loans secured by a pledge: These loans can be secured by a savings account, or some other asset that has value, and the lender accepts to secure the loan.
- Credit cards, which are revolving lines of credit. If you have a credit card with a £2,000 credit limit, you can make purchases up that limit of £2,000. As you pay the balance of the credit card down, it allows you access back to the credit limit of £2,000.
- Personal loans
- Lines of credit and these can include overdrafts.
- Car or vehicle loans. These can be secured or unsecured, it depends on the type of loan, and how it is set-up. For example, you can take out a personal loan to buy a car. The loan is not secured by the car.
- Bad credit loans, such as a payday loan or guarantor loan. These are typically unsecured, but are secured in the sense that you are working and receive wages, or someone has signed a guarantor for the loan.
As to why we would seek out a loan, the reason is obvious, we do not have the cash on hand to make the purchase we wish to make.
In the example of buying a car or a property, we rarely have the cash at hand to pay for these; so we take out a loan.
Credit cards are a good way to make purchases without carrying around a lot of cash, and they are the only way to make purchases on the Internet. Credit and or debit cards.
Personal loans are a way to consolidate other accounts, or to make purchased, once again as we do not have the cash to do so.
Lines of credit or overdrafts are a way to bridge the gap between money we will have in a few days or weeks, and money we need now.
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