There are two basic categories that most loan types are labeled as: Secured and Unsecured.
Secured loans are usually the best way to obtain larger amounts of money because they act as proof that the loan will be repaid because it provides larger consequences that the borrower will suffer in the outcome that it doesn't fulfill on repaying the loan.
A secured loan is a loan that is collateralized and that places a lien on an asset of the borrower. The finance company or bank will hold the deed or title on the asset until the loan has been paid in full, including interest and all applicable fees. Other forms of acceptable collateral include items such as stocks, bonds, or personal property to secure the loan as well.
The biggest difference between secured and unsecured personal loans is what happens if you stop making payments, or default, on the loan
A secured loan agreement gives the lender the right to seize the collateral without going to court. The borrower will likely would be given the chance to make good on the debt; therefore correcting the default late, before the lender places a lien against the asset. The late payments however will negatively affect the borrower's credit scores. Examples of Secured Loans:
- Home Equity Line of Credit
- Auto Loan (New and Used)
- Equipment Loan
- Merchant Cash Advance
On the other hand, if an unsecured loan borrower defaults and does not repay the loan back, the creditor would have to sue and win a court judgment to collect what is owed. The borrower would suffer late payments on their credit scores; and a Judgement could eventually be placed on their public records, negatively affecting their credit scores with such derogatory items like lates, collections, liens, and judgements. Interest rates:
The better your credit scores, the lower the rate you'll be offered on any loan, secured or unsecured. But secured loans are less risky for lenders, and the rates are considerably lower. Credit requirements:
A borrower who doesn't qualify for an unsecured loan might qualify for a secured personal loan. But your credit
history and ability to repay are always factors. Examples of Unsecured Loans:
- Credit Cards
- Signature Loans
- Lines of Credit
- Student Loans (note that tax returns can be garnished to repay delinquent student loans)
- Personal Loans