Finance Globe

U.S. financial and economic topics from several finance writers.
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Unsecured Loans vs. Secured Lines of Credit


Whichever reason you need a loan there are thousands of different choices to make before applying. The first of which is what type of loan to get, unsecured credit loans or secured credit loans. It's important to understand the difference between the two and how both can benefit or put you at a disadvantage. The first crucial decision is do you want a loan or a line of credit? What's the difference between them?

A loan and line of credit are two distinctly different types of loans. Both can use collateral and both can have varying interest rates. The most significant differences between a loan and line of credit is a loan has a onetime use and is paid off, and the line of credit can be used over and over. Also it's important to note that monthly payments on a loan are amortized and much higher than a line of credit. The reason the loan payments are higher is because there is a deadline to pay the loan off. The system configures a set of monthly payments over a period of time with a specific pay off date in mind. This means two things: the loan must have an appropriate pay off date, thus total amount, which make monthly payments bearable, but it also means the monthly payments usually don't change, unless you have a variable loan.

A line of credit is a loan which has no due date of payoff and when the funds are paid off can be reused. Credit cards are a good example of a line of credit, but there are many other types as well.

When choosing to get either a loan or line of credit, you can find both with collateral or no collateral based. In essence that means unsecured (no collateral) or secured (collateral).

There are unsecured credit cards and loans; however, both have high interest rates. The bonuses of having a credit card is that you can reuse the funds as you pay them down and the monthly payments can be very small compared to a loan. Credit cards and lines of credit are useful in many different situations, like renting a car, holding a reservation etc.

Secured lines of credit are backed by collateral. The single most used line of secured credit of recent is the equity type. This type of credit line is based on the value of your home – your unpaid mortgage balance. Because this amount can run into the hundreds of thousands, many people choose these types of lines of credit over credit cards and other such loans. The benefits are many including high limits and best of all, low interest rates. Lenders are much keener to give a loan with an important collateral base, such as a house.

An unsecured loan is higher interest, higher payments and in general, a bad idea. Secured loans, however, can be just as risky; especially if using a house as collateral. Think carefully before trying either type of loan.

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Sunday, 21 April 2024

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