With any type of loan, a lender or a creditor offers a borrower a certain sum of money. The borrower then promises to pay back that loan in a certain period of time. To make money, the lender usually charges a certain small amount of interest on the amount of the loan, usually as a percentage of the amount of the loan. Based on the credit score of the borrower, the interest rate may be higher for these
Secured Loans or Unsecured Loans
There are two major types of loans, based on the security of the loan.
If a loan is secured (a secured loan), then the borrower has to offer a tangible asset in exchange for the amount of the loan. A car or a house are the most common types of asset offered in secured loans.
In the event that a borrower defaults on a secured loan, the lender is permitted to claim the asset (so, the car or the home) that has been used to secure the loan.
An unsecured loan is a loan that doesn't have collateral. Unsecured loans make up the majority of consumer debt.
A credit card or a payday loan is an unsecured loan because there is no specific asset for the lender to claim if the borrower defaults on their debt. Instead, the unsecured lender only has an obligation to the dollar amount of the loan (plus interest and agreed-upon fees).
Common Names for Different Types of Loans
Typically, loans are named after the item that secures them or by the way they are presented. We have information in our site on the following loans:
- Home Loans
- Auto Loans
- Personal Loans
- Payday Loans & Cash Advance Loans
- Debt Consolidation Loans
Home loans or home mortgages are secured loans intended to help the borrower purchase a house.
Auto loans are secured loans intended to help the borrower purchase a new or used car.
Personal loans can be secured loans or unsecured loans. They can be used for a variety of purchases, from buying a car to buying a boat to consolidating debt. They are usually based on income statements in addition to credit evaluations.
Payday Loans & Cash Advance Loans
Payday loans are short, small, unsecured loans of up to $1000 that borrowers use to bridge the gap between paydays. Payday loans tend to have high interest rates.
For more information on payday loans, please visit The Center for Responsible Lending.
Debt Consolidation Loans
Debt consolidation loans are unsecured loans or secured loans that allow borrowers to lower monthly payments and interest rates on debt, by borrowing a similar amount in one lump sum.
Most of the loans described above are loans designed for borrowers with no credit to good credit.
These loans are made to borrowers who do not have a good history of repaying borrowed money. Borrowers may have been overwhelmed by financial emergencies or they may have simply overspent.
Credit Score and Credit Report
In order to determine how much interest a lender should charge you on your loan, frequently they will look at your credit history. Compiled by one of three nationwide companies, your credit report has lots of information about your credit history.
If you have a poor credit score (also known as a FICO credit score) or bad credit reports (your credit score is based on your credit reports), you can repair your credit by disputing inaccurate information on your credit report. This may improve your credit score and allow you to obtain loans at a lower interest rate.