There is more than one type of loan. Depending upon your situation, you might
find that what works in one circumstance does not work in another. This means
that it is very important for you to educate yourself about different kinds of
loans so that you are more prepared when you speak with a lending officer, or
with a financial counselor. It is especially important that you understand what
the different sorts of loans entail so that you are not pushed into making a
wrong decision by a lender that is more interested in a percentage rather than
your financial well being.
Understanding the difference between a secured loan and an unsecured
loan.
At their very basic, loans come in two kinds: secured and unsecured. Whether
you are looking into business loans or personal loans, they will either be
secured or unsecured. Credit cards, which are basically consumer loans, are also
denoted with these names. However, you will find that most credit cards are
unsecured, unless they have a very high limit.
A secured personal loan is one that requires a form of collateral. Collateral
is something of value that the lender can possess if you fail to meet your
obligations. A home loan is a secured loan. If you default, then the lender can
take your home to cover its costs. Auto loans and car title loans are other
examples of this. It is also possible, for smaller loans, to offer valuable
jewelry or electronic equipment as proof that you will pay back the money you
borrow. However, it needs to be something that the lender feels it can use to
recover its loss should you default. If you are seeking a bad credit loan, more
than likely you will have to put forth some collateral. When you have less than
favorable credit, you are immediately seen as a higher risk, and therefore must
offer something to justify the risk the lender acquires in allowing you to
borrow money.
Unsecured loans are the opposite. They require no collateral. As mentioned
previously, credit cards are a form unsecured loans. Many banks offer small
signature loans. These are usually loans of between $500 and $3,000. Most
unsecured debt comes in smaller amounts. This is because if you stop making
payments, the lender loses what you have been lent. They can turn you over to
collections, and can call demanding payment, but, ultimately, if you have no
money and cannot pay, the lender loses out. However, the cost to you is also
great. Your credit is effectively destroyed, making it next to impossible for
you to get a mortgage in the future. It can even hamper your chances of
receiving approval for an auto loan or a credit card.
