Overview of the Different Types of Loans – Secured and Unse

A secured loan is a type of loan which is backed by a form of collateral, which can be anything from an automobile, money in the bank, property, or similar valuable items sometimes even expensive jewelry items. An unsecured loan on the other hand is not backed up by any collateral meaning you will get money on your ability to repay the loan back and on the strength of your perfect credit.

Installment loan – under this type of loan, you commit to pay an agreed amount of money, which covers both the principal and the set interest each month. Every time you make a payment the outstanding balance on the loan reduces until the entire loan is paid off in full. Unlike a revolving type of loan, an installment loan will always have a fixed date in which the loan comes to maturity, which is known as the term of the loan.

Fixed interest rate loans – this is exactly as the name would suggest; the borrower and the lender agree to a specific interest rate which will remain ‘fixed’ until the loan comes to maturity. A fixed interest rate loan is ideal because it gives you the constancy to always know what your monthly payment will be, hence you can be able to budget and plan accordingly.

Revolving loan – this is a type of loan where you are given access to an uninterrupted source of credit until you get to your credit limit. You will be expected to repay back only the amount of credit that you have used, and the accrued interest on the unpaid amount. With a revolving type of loan, you can re-borrow the basic principal that you have already paid. This therefore means one thing … your loan can remain ‘open’ for several years.

Adjustable interest rate loan – otherwise known as a variable interest rate loan, the interest rate will always fluctuate within the loan tenure as the rate is normally determined by the Prime Rate. The Prime Rate is the rate of interest chargeable by the U.S. Treasury to its great borrowers. What this therefore means is that if the Prime Rate goes high, as it sometimes does as is the case with inflation, borrowers will end up paying a lot more.

By the same token, should the Prime Rate go down e.g. when the government is seeking to stimulate a bad economy in the course of a recession, the rates will go down significantly, meaning you get to save a substantial amount in terms of interest. Should you borrow a loan in the course of a high interest period, once the prime rate drops, it means your monthly payments will also drop significantly.

Those are the basic categories under which secured and unsecured loans fall under.