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Loans & Credit Cards - Types and Terms
Unsecured Loans Credit cards, personal loans, and lines of credit are typically unsecured loans. This means they are not tied to any assets that you own. In other words the bank is relying on your good faith to pay them back. Credit cards and lines of credit are usually revolving loans. This mean that you can pay the balance down or draw more credit at any time as long as you do not exceed the limit. They also require that you make at least a minimum monthly payment against the debt. The term revolving denotes the open-ended nature of this type of loan. Personal loans can be revolving but they are often fixed term installment loans. Fixed term loans have a pre-determined amount of time in which they are paid off (2,5,10 years). The monthly payment can be fixed or adjustable with personal loans. If the interest rate on your personal loan is adjustable your monthly payment can go up and down but the loan will still be fully paid off at the end of the term. More info: Unsecured Loans Secured Loans Home mortgages, home equity loans, auto loans, etc are secured loans. This means they are tied to real assets. If you fail to repay your loan the financial institution can take ownership of the asset. For example your car will be repossessed or your house will be foreclosed upon (taken back by the bank) if you fail to make the payments. Secured loans are less risky for the bank because they can reclaim the assets and sell them to recoup their losses. As a result they can offer lower interest rates on secured loans. Auto Loans are typically fixed term, fixed rate loans. They are usually paid off over 3-5 years with a fixed interest rate. Mortgage loans, home equity loans/lines are always secured against real estate but come in many forms. They can be hybrids of fixed and adjustable and have many different way to amortize. More info: Secured Loans
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