12 Feb Types of Loans and The Outcomes They Have

Posted at 08:37h in Loans/Finance by

If you’re anything like most young people, getting your head around loans seems a daunting prospect. Luckily, loans aren’t that complicated. They’re a powerful tool for reaching financial and personal goals, each sort having its impact on your future and your credit. These are the types of loans and the impacts on your financial well-being they have.

There are three types of loans: secured, unsecured, and revolving.

Secured loans

Secured loans are loans that use an asset (anything of monetary value) you own as collateral (something the creditor can sell if you don’t pay them back.)

Usually, secured loans are less risky for lenders, as they have the opportunity to seize the agreed-upon collateral (called repossession)  if you default (don’t pay.)

Examples of secured loans using collateral could be houses (mortgage) or cars (auto loan.) In these cases, the house acts as the collateral to the mortgage–they’ll take the house away if you don’t pay them back. Same with the auto loan–if you don’t pay creditors back, they’ll sell your car. Mortgages and auto loans are also examples of term loans, loans paid back over a specific period, say month-to-month.

Unsecured loans

Unsecured loans generally have higher interest rates than secured loans because they don’t use collateral. Instead, your eligibility for these loans depends on your creditworthiness and income. While they don’t use collateral if you default, they may use collection agencies, legal action, and severe credit score detriment.

Examples include personal loans (like medical bills or debt consolidation) and student loans.

Revolving loans

Revolving loans are usually those you get with a credit limit, or limit on how much you can borrow. They allow borrowing up to a credit limit, repaying minimum payments or the entire balance each month (e.g., credit cards, home equity lines of credit). Credit card loans offer flexibility but require strong financial discipline to avoid accumulating debt.

One of the different types of loans.

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