Different Types of Loans All loans, no matter what they are, are either secured or unsecured. Knowing the difference can better help you understand how they work and what to expect when applying for one. Secured Loans A secured loan is one that relies on an asset, such as a home or car, as collateral for the loan. In the event of loan default, the lender can take possession of the asset (foreclose on a home or repossess a car, for example) and sell it to recover the amount of money loaned. For this reason, interest rates for secured loans are often lower than those for unsecured loans. In many cases, such as in the purchase of a home, the asset to be used as the collateral will need to be appraised before the terms of the loan can be set. Examples of secured loans are: • Car loans • Boat (and other recreational vehicle) loans • Mortgages • Construction loans • Home equity loans • Home equity lines of credit Unsecured Loans Unsecured loans do not require the borrower to put forth an asset for collateral. The lender relies solely on the borrower’s credit history and income to qualify him for the loan. If the borrower defaults, the lender usually has to try to collect the unpaid balance through a variety of efforts which may include using collection agencies, freezing accounts, lawsuits, and garnishing wages. Because there is a considerably higher assumption of risk on the lender’s part with an unsecured loan, the interest rate is usually much higher. They are often more difficult to obtain and the amounts loaned are usually lower than that for secured loans. Examples of Unsecured Loans are: • Personal loans • Personal lines of credit • Student loans • Credit cards/department store cards Payday Loans Payday loans are relatively new on the loan scene. They are short-term loans borrowed using the borrower’s next paycheck as guarantee for the loan so, in a way, they are secured. However, payday loans have notoriously high annual percentage rates (APRs) and can be difficult to pay off. Banks do not generally offer Payday loans. Most establishments offering them are private companies with separate storefronts. Title Loans A title loan, also fairly new, is a type of secured loan where the borrower can use their vehicle title as collateral. Borrowers who get title loans must allow a lender to place a lien on their car title, and temporarily surrender the hard copy of their vehicle title, in exchange for a loan amount. When the loan is repaid, the lien is removed and the car title is returned to its owner. If the borrower defaults on their payments then the lender can repossess the vehicle and sell it to repay the borrowers’ outstanding debt. Typically, the same companies that offer Payday loans will also offer title loans. Student Loans Student loans are, of course, used to get a person through college or other educational institution. There are many different types of student loans including: Stafford loans, the most common federal education loans students receive. They can be either subsidized or unsubsidized. Perkins loans, low-interest federal loans, administered by the school, for students who demonstrate exceptional financial need. PLUS loans, usually used to cover expenses not met by other federal financial aid. These can be taken out by dependent students’ parents or by graduate students. Institutional loans, non-federal aid that schools loan their students. Private loans, usually sought by parents of students ineligible for other aid or those who do not receive enough aid to cover the cost of attendance. In many cases, these must be secured by some form of collateral.
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