With so many loan products available to consumers today, you really need to educate yourself before signing on the dotted line.  The next time a bank representative tries to sell you a loan you will be better equipped to make a decision to suit your financial needs.  There are two basic types of loans, secured loans and unsecured loans.  A secured loan is a loan given with collateral.  An example of a secured loan is a mortgage loan or an auto loan.  If you fail to pay the loan the lender can foreclose or repossess your property.  An unsecured loan also called a personal loan is given solely on your ability to repay and your character.

Let's examine a little more closely the advantages and disadvantages of each loan product.

Secure Loans

Advantages of a secured loan:

 

1. You are in a better position to get the loan because you have given something of value.
2. When you take out a secured loan the interest rate is usually a lot lower due to the security backing the loan.
3. A person with poor credit may be eligible because of the collateral.
4. Large sums of money are lent based on the value of the security.
5. Borrowers are able to choose their payment terms, fixed or variable rate.

    
Disadvantages of a secured loan:

1. A lien will be placed on your property.
2. There are extra fees you will have to pay to secure the loan.  For example homeowners insurance, Auto insurance, appraisal and title fees.
3. There are a lot of documents to sign in accordance with the loan.  You may feel as though you’re signing your life away.
4. You can lose all interest in your property if you fail to meet your financial obligations.
5. It can take from 5 to 30 years to repay the loan.

Unsecured Loans

Advantages of an unsecured loan:

1. There is no collateral required.  The borrower may rest a little easier knowing that they don’t stand to loss any personal property.
2. The repayment schedule is shorter than a secured loan.
3. The loan amount is small making it more affordable to repay faster.
4. You are granted the loan based on your good credit.
5. The lender has no claim on property you acquired from the loan.
6. There is far less paper work involved in an unsecured loan resulting in fast processing.

Disadvantages of an unsecured loan:

1. Unsecured loans are usually only extended to people with excellent credit.
2. These loan products usually come with a higher interest rate.
3. You are limited on the amount you can borrow because there is no security backing it.  Loan amounts are usually $500 to $10,000.

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Knowing the difference between each loan type will help a lot during your next meeting with your financial advisor, but you also need to know what your credit history is like.  The federal government now allows each consumer access to a copy of their personal credit report from the three repositories once each year.  This important information will save you a lot of money when seeking a loan.  Why, because many loan officers are less than honest and are paid a commission on the loan products they sell you.

Which ever loan product you choose, you will still have to meet the lender’s eligibility requirements.  Some requirements include credit and income verifications.  Even if you have opted for a secured loan you will be required to prove that you have enough income to comfortably meet all your current obligations along with your new payment.  With both types of loans the lenders report your payment history to the credit bureaus.  This is an excellent way for those with poor credit to get their credit history back in order so you could possibly get an unsecured loan should you need to borrow money again.

Tags: credit report, credit repair