Using loans is a normal part of everyday life. As a wise consumer, what you do with these loans will determine your overall financial make up and help gage your success as a borrower.
There are two types of widely recognized loans. Secured or unsecured.
Secured Loan. Secured loans are those where there is collateral involved to “secure” the loan. This means that the loan is required to have some form of physical item that is attached to the loan so that in the unfortunate case of having the loan go into default, that item will then be surrendered to the lender so that they can in turn, sell the item in order to recover their loss on the loan.
The secured loan amount is at the discretion of the lending institution. In turn then, the collateral can be any item that the lender chooses which is owned by the borrower. They hold the ultimate say in whether or not an item can be used. They also will want to see the item to assess its value and to take a picture to place with the loan papers. It is not uncommon for a lending institution to require more than one item of collateral to secure a loan. If the collateral is an item that requires a title of ownership such as an automobile or even a house or piece of property, the lending institution most likely will require that they have physical custody of that title until such time as the loan is paid in full.
Unsecured Loan. Unsecured loans are those that do not require any collateral to secure them. They are completely unattached to any material item of value other than the borrower’s ability and promise to pay the loan in full. Since the risk is higher for the lender in this case, usually, the loan amounts are lower, and the interest rates are generally higher.
Also playing a part in this transaction is the borrower’s payment record. This is where credit reporting bureaus come into play. A consumers’ payment record will be accessed at the time of a loan application in order to determine the propensity for paying on-time. A person’s credit record is given a numerical score upon which the loaning entity will base its interest rates. The lower the credit score, the higher the interest rate.
Whether secured or unsecured, loans of this nature are generally considered higher risk and therefore are more expensive to the borrower. Learning to live outside of the need for these types of loans is a wise financial decision.
This is exactly the sort of thing I was asked about the other day.
How often do you post? I might just refer them here rather than trying to explain it myself and mess it up.
Really cool blog. I found it on yahoo. I am looking forward to read more posts.
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
There is a huge demand right now with secured loans. My sister just went through bankruptcy and this really is the only way that she will be able to start building up a credit rating again. It is a good option for many people.