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Secure vs. Unsecured Loans
Essentially, there are two types of loans: secured loans and
unsecured loans. Secured loans are loans in which you pledge
some sort of collateral. The bank may repossess the collateral if you do
not repay
the loan according to the terms you agreed to when you took
out the loan.
Unsecured loans are not backed by any collateral. You borrow
money on the strength of your good credit and ability to repay
alone.
Revolving vs. Installment Loans
Revolving and installment describe the amount of time you have
to pay back a loan. With a revolving loan, you have access
to a continuous source of credit, up to your credit limit.
You repay only the amount of
the credit you use, plus interest on the unpaid amount. You
may re-borrow the principal you've repaid. So the loan could
remain "open" for
years.
With an installment loan, you pay an agreed amount, which includes
principal and interest, every month. Each payment reduces the
balance of the loan until it is paid off. There is a fixed ending date,
known as the
term of the loan.
Fixed vs. Adjustable Interest Rate Loans
Fixed interest is just that. You and the bank agree to a certain
interest rate and it remains constant throughout the term of
the loan. Fixed interest rates give you the stability of always knowing
what your
payment will be, so you can budget accordingly.
Adjustable or variable rate interest fluctuates. Usually it
is pegged to the Prime Rate - the interest the U.S. Treasury
charges to its best borrowers. When the Prime Rate is high, such as during
a period
of inflation, you pay more. When the Prime Rate is low, such
as when the government is trying to stimulate the economy during a recession,
you save
on interest. If you need to borrow during a period of high
interest, your payments will drop once the Prime Rate drops.
Types Of Loans
Auto Loans: A secured loan in which the collateral is the vehicle
you purchase.
Credit Cards: An unsecured loan which allows you a line of
credit against which you may borrow by presenting a plastic
card to the merchant from whom you are purchasing the item. You may make
more than
one purchase, up to your credit limit.
Personal Loans: Secured or unsecured loans made for a fixed
purpose.
Mortgages: A secured loan in which the collateral is the real
estate you buy.
Home Equity Loan: A secured loan for a fixed amount in which
the collateral is your home. In some cases, the interest on
this loan may be tax deductible. See your accountant.
Home Equity Credit Line: A secured, revolving line of credit
in which the collateral is your home. In some cases, the interest
on this loan or a portion of it may be tax deductible. Consult a tax professional
or your accountant.
Home Improvement Loan: A secured loan for a lump sum fixed
amount in which the collateral is your home. The money may
only be spent on home improvements. The interest on this loan
may be tax deductible.
Consult a tax professional or your accountant. (In some areas
of the country, a home improvement loan "secured by the equity in your home" may
not be available. In these areas, an unsecured home improvement
loan would be available.)
Student Loan (Stafford Loan) A loan for college expenses underwritten
by the U.S. Government. The loan is granted to the student.
Payment is deferred while the student is still in school.
Personal Line of Credit: Unsecured loans allowing you access
to funds up to a fixed credit limit.
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