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What Are the Different Types of Loans Available?

Secured vs. Unsecured
Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans. As the term implies, a secured loan means the borrower is providing “security” that the loan will be repaid according to the agreed terms and conditions. It’s important to remember that in the event a secured loan is not repaid, the lender has direct recourse to the collateral and may be able to sell it to pay off all or part of the loan. Examples of secured loans include Home Equity Loans, Home Equity Lines of Credit, auto loans (new and used), boat loans, recreational vehicle loans and Home Improvement Loans.

When applying for a loan that is unsecured, the lender does not take a lien on property or collateral, like a home or car as security in case the borrower becomes unable to repay the loan. The lender believes that the loan will be repaid based on the borrower’s creditworthiness and financial resources. Unsecured loans are usually offered at a higher rates than secured loans and have lower borrowing amounts. Examples include Personal Loans, Personal Lines of Credit, student loans and some Home Improvement Loans.

Fixed vs. Variable
On a fixed rate loan the interest rate remains the same throughout the term of the loan and the principal balance is steadily reduced as payments are made. With the security of knowing from day one what the monthly principal and interest payment will be, it is easy to budget and plan for the future.

When a loan (including a variable rate line of credit and adjustable rate Home Equity Loans) has a variable rate, the rate changes periodically to reflect market conditions. Variable rates are generally initially lower than those on fixed rate loans, but can change monthly. The rate on a variable loan can go up or down depending upon the index the loan rate is tied to. There is a built-in ceiling on how high a variable rate can rise so that it never exceeds a specific rate.

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