Learn more about loan types:
Secured Loans
The most common type of loan is a secured loan. Secured loans are backed by property you own or purchase, such as your home or car. The property is pledged as security, also known as collateral. The bank may place a lien on the title, which restricts the sale of the property until the loan has been paid. If you fail to repay the loan, the lender has the right to seize your property to recover the loan balance. If the sale of the asset does not cover your loan balance, the lender has the right to collect the difference.
Examples of secured loans:
- Mortgage (home loan)
- Car loan
- Boat, motorcycle, or other recreational vehicle loan
- Home equity loan
- Home equity line of credit
- Secured credit card (backed by a savings account)
Unsecured Loans
An unsecured loan is not backed by collateral. Since the bank has nothing to seize if the debt is not paid, unsecured loans require a strong credit history, and often carry a higher interest rate than secured loans.
Examples of unsecured loans:
- Credit cards
- Student loans
- Personal loans/lines of credit
Open End/Closed End Loans
Most secured loans are closed-end, which means you borrow a specific amount for a set time, with a predetermined payment schedule. Vehicle and home loans are examples of a closed-end loan. The balance begins with the full amount of the loan and decreases as payments are made.
Open-end, also known as revolving loans, allow you to borrow any amount, at any time, up to your specified credit limit. The balance can increase and decrease over the life of the loan. Instead of having a predetermined payment schedule, you decide how much to pay, as long as it meets the established minimum payment amount. An example of an open-end loan is a credit card.
