There are many other kinds of ways for borrowing cash but all those different financing vehicles can actually be classified into a “secured” or “unsecured” loan. These are the only two basic kinds of loans that exist for any borrower. Knowing the difference is important if you want to be wise when it comes to your money. When you start looking into personal financing options you’ll quickly learn that there are different ways to borrow cash for all sorts of things that you need money for.

Unsecured loans are financing vehicles which are given to you based on your credit score and not based on any single thing you offer up for collateral. Your credit rating is really a measure of your expected ability to pay off debts. If you’ve always paid your debts on time then you probably have a pretty good credit rating. Most credit cards are really considered to be an unsecured type of financing. Unsecured loans are good for small purchases which you can pay off quickly. Even store credit cards are good to use in some cases because the credit limits are low and the introductory interest rates are often decent.

Secured loans are a type of loan in which the bank has some sort of collateral or payment to hold until you pay off the debt. When you finance a car or buy a house with a mortgage the bank technically owns what you bought until you’ve paid off the debt amount plus interest. If you don’t pay off your loan then the lender can take your collateral and sell it in an effort to regain some of the money you borrowed.

Secured loans such as home equity loans generally have a lower interest rate, which makes paying them off easier over the life of the loan. There is often more paperwork associated with secured loans because they are so much bigger than most unsecured loans. Depending on your tax situation you may even be able to reduce the income tax that you owe. Common secured loans include home mortgages, new car loans and many major house updating loans.

Many costly projects are revised when people finally begin to understand how various loans work. No matter what type of financing you consider don’t forget that you do have to pay the money back and you will be paying interest on the amount that is owed. Be careful and make sure you can really afford the monthly payments before you go forward with your loan.

This entry was posted on Wednesday, June 9th, 2010 at 3:35 pm and is filed under Mortgage Loan Refinance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.