In the world of personal finance, there are essentially two types of loans. One is called a secured loan and the other is called an unsecured loan. With a secured loan, the applicant has to put up some form of collateral. These loans are called secured because they are backed by an asset which is owned by the applicant. A perfect example of a secured loan would include a mortgage, one where the bank or financial institution’s risk is lowered because the house is used as collateral. So, what is an unsecured loan? More importantly, what types of unsecured loans are there?
An unsecured loan is one where there is no collateral or lien against the loan. It is considered uncollateralized and the applicant doesn’t need to put up any assets to back up the loan. Typically, people applying for unsecured loans have to have a high credit rating, which means they’ve demonstrated an ability to repay previous loans and or cash advances without defaulting. The approval process for this type of loan is fairly quick. However, due to the nature of the loan, and the fact that it is considered uncollateralized, the interest rates tend to be higher.
Revolving Line of Credit: Revolving lines of credit typically involve lower interest rates and are used by homeowners and businesses as a means of financing. These types of loans have a maximum amount that can be withdrawn during the duration of the loan. It is called revolving because the individual can continue to draw on the credit line so long as he or she does not exceed the maximum amount as defined by the credit line. Any payments made reduce the balances owing, while still allowing the individual to continue to withdraw funds up to the maximum amount within the agreement.
Credit Cards: This type of unsecured loan tends to have higher interest rates and allows individuals to secure short-term cash advances. Credit cards are often used at point of sale transactions when individuals purchase goods and services. The amount the individual can borrow is predetermined by their credit rating. Interest is charged on outstanding balances for those purchases made the month prior.
Student Loans: Student loans are typically provided as low interest rate loans in order to allow individuals to pay for a college or university education. Repayment periods are longer and interest rates tend to be lower. It’s also common for these types of loans to be provided through different branches of the government.
Individuals that use unsecured personal loans must pay close attention to these aforementioned interest rates as they are applied against the outstanding balances on the loan until that loan is repaid in full. It’s common for individuals to allow these interest rates to build up over time, which ultimately means it will take longer to repay the loan.