In a perfect world, you’d have unlimited cash at your disposal, but since this is not the reality for most people, applying for a loan can be a helpful option in times of need. A loan is ideal if you want to consolidate debt, buy a house or car, or go to college.
Before you take out a loan, however, it’s important to understand the various options at your disposal and understand the difference between what a secured loan is and what an unsecured loan is. Doing so lets you home in on the ideal product for your unique situation and goals.
What is a secured loan?
A secured loan is backed by an asset, such as a piece of property or a car. This means that if you default on the loan, the lender can seize the asset to recoup their loss.
What is an unsecured Loan?
An unsecured loan is not backed by an asset. This makes them riskier for lenders, so unsecured loans usually have higher interest rates than secured loans. If you are considering taking out a loan, it is important to weigh the risks and benefits of both types of loans before deciding.
5 Types of secured and unsecured loans
Whether secured or unsecured, applicants should be aware of various types of loans, and each type has its own terms and conditions. Below are some of the most common types of loans you should know about.
1. Personal Loans
Personal loans are unique in that they’re flexible. While some lenders impose use restrictions, most will allow you to use the proceeds on home improvement projects, car repairs, medical bills, weddings, vacations, and virtually any other planned or surprise expense you might have. Most personal loans are unsecured, so you don’t need collateral or a valuable asset to take them out.
2. Car Loans
Car loans are exactly what they sound like loans intended for vehicle purchases. A car serves as collateral in a car loan. If you fail to make your payments, a lender can repossess the vehicle. Car loans are usually available through banks, credit unions, online lenders, and car dealerships, with terms ranging from 36 months to 72 months.
3. Student Loans
Student loans are intended to help with education costs. These might include tuition, room and board, books, and supplies. Since federal student loans are funded by the Department of Education, they come with unique perks like deferment, forbearance, forgiveness, and income-based repayment plans; it’s a good idea to consider them first. You can always take out private loans to cover any remaining amount.
4. Mortgage Loans
Mortgage loans cover the purchase price of a home. Since the property serves as collateral, you can face foreclosure if you default on a mortgage. Options include conventional mortgages from private lenders or government-backed mortgages, like Federal Housing Administration (FHA) Loans, Veterans Administration (VA) Home Loans, or, if you are in a rural area, a United States Department of Agriculture (USDA) Home Loan. While most mortgages have fixed interest rates that remain the same over their term, adjustable-rate mortgages with rates that fluctuate based on the market are also available.
5. Debt Consolidation Loans
Debt consolidation loans can come in handy if you have a lot of high-interest credit card debt. With a debt consolidation loan, you can combine multiple debts into a single loan with one, easy-to-manage payment. Ideally, a debt consolidation loan will have a lower interest rate than the rates you pay on your current debts, saving you money in interest. However, keep in mind that taking out a debt consolidation loan often means you’re extending the time to pay off the loans.
The Bottom Line
Before you commit to a loan, shop around and explore all your options. Consider factors like the purpose of the loan, your credit history, and your finances before you choose a product and sign on the dotted line.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of CitizenSide or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
