Did you know that the average credit score in the United States is 711? Having a good credit score allows you to buy cars with lower interest rates, qualify for fantastic credit card rewards, and take out a loan when you need one.
Loans are essential for paying off credit card debt, buying a house, or buying that new boat you have been dreaming of. If you are thinking about taking out a loan, you first need to know the difference between secured and unsecured loans.
Do you know the difference between these types of loans? If not, keep reading to learn all about getting a loan.
What Is a Secured Loan?
A secured loan is a type of loan backed by some type of collateral. If you can’t make your loan payments, the lender can take the collateral in exchange for not making the payments.
With a secured loan, the lender holds the title or deed until the loan is paid off. You don’t own the object until you pay all the money.
Secured loans are one of the most common types of loans because they are not as risky for lenders. If you don’t pay the money, the lender is not harmed.
Examples of a Secured Loan
You can have a secured loan backed by stocks, your house, bonds, or your own personal belongings. Because there are many ways to back a secured loan, there are several different ways to use them.
One of the most common types of secured loans is an old car title loan. With a car loan, you make monthly payments while the lender holds the car title. If you stop making the payments, the lender has the right to repossess the vehicle.
Some other common types of secured loans include house loans, boat loans, and RV loans.
What Is an Unsecured Loan?
An unsecured loan is the opposite of a secured loan. Unsecured loans are not backed by any type of collateral. Instead, lenders use your credit score and credit history to determine how likely you are to pay them back.
Because unsecured loans are not backed by collateral, they are more likely to have higher interest rates and fees than secured loans. If you need money now, getting an unsecured loan is the best option.
Examples of an Unsecured Loan
What are some of the most common types of unsecured loans? The type of unsecured loan that people have the most experience with is credit cards. Credit card companies determine your worthiness based on your credit score, and they charge high interest rates.
Some other common types of unsecured loans include personal loans, student loans, and home improvement loans.
Now You Know the Difference Between Secured and Unsecured Loans
If you want to buy a car, take out a credit card, or invest in a house, it is important to know the difference between secured and unsecured loans. While a secured loan is backed by collateral, unsecured loans are not.
Did you enjoy reading this article about securing a loan? If you are looking for more similar advice, check out the business and finance category for more.