Loans break down into two basic categories – secured loans and unsecured loans. The difference between the two is that secured loans have a piece of property attached as a collateral and unsecured loans only have the borrower’s personal guarantee. If you default on a secured loan, the lender can repossess the collateral to cover what you owe. For a default on an unsecured loan, the lender would typically send the loan to collections.
There are many different types of secured loans available. Here are how some of the most popular options work.
A mortage is a loan to purchase a home, which means the home is tied to the loan as collateral. Because of how much homes can cost, mortgages often have 30-year terms, and the application process to obtain one can take months. These also have some of the lowest interest rates of any type of loan because of their lengthy terms. You’ll need to present quite a few financial documents to the lender, including income verification and bank statements. Lenders will require a down payment on the home, and paying more will result in better loan terms.
A vehicle loan is a loan to purchase a car. The car that you purchase serves as the collateral, and standard loan terms are between five and seven years. It’s always better to go with a shorter loan since you’ll pay less interest. You can get better terms on your loan with a larger down payment, but lenders don’t always require a down payment. Many car dealers offer new models with no money down to attract buyers, and you may also find deals where you don’t pay any interest if you pay off the loan within a certain time frame.
With a pawnbroker loan, you take a piece of property to a pawn shop and give it to them as collateral. The pawn shop then issues you a loan, although the loan amount will be much less than the item’s value to ensure that the pawn shop doesn’t lose any money if you default. You get your collateral back when you pay off your loan.
A title loan is similar to a pawnbroker loan, and some pawn shops offer title loans in states where the law allows it. A title loan is a loan against the value of your car, so you must own the car and have no outstanding loans on it, such as a vehicle loan. Unlike a pawnbroker loan, the lender doesn’t keep your car during the term of the loan. Instead, they only keep the car title. If you default on the loan, the lender can then repossess your car.
Getting the Best Deal on a Loan
When it comes to mortgages and car loans, your financial situation will play a major role in the terms of your loan. While putting more money down can help you secure more favorable terms, your credit score will also play a significant role. Since both are large loans, you should improve your credit score as much as possible before applying to get a lower interest rate. Your credit score won’t factor in to pawnbroker loan or title loan terms, which depend entirely on the collateral.