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Loans fall into two basic categories. These are the secured and unsecured loans. The difference between these two loans is the amount of security attached to each. Secured loans are safe because of the element of collateral. On the other hand, unsecured loan are loans issued without any collateral. In addition there are other kinds of loans such as bad credit personal loans etc.

Secured Loans

Collateral such as a house or a car can be used to access loans from different financial institutions. In the case of a house, one will have to deposit a genuine title deed with the lending institution. If one borrows a loan through his or her car, he or she will have to leave his or her logbook with the bank. The bank will remain in possession of the collateral until the last interest installment has been fully paid. Besides a house or car, other items such as bonds and stocks may be floated as collateral. The advantage of secured loan is that they have the element of absolving any risks of default because of the presence of collateral. Once a borrower has put his or her property to secure the loan, there is every possibility that he or she will do everything to repay the loan.

It is imperative to note that secured loans can be in the form of home equity loans. The home equity loan is calculated as the prevailing market value of the home minus the amount owed. With secured loans, you receive lower rates, longer repayment horizon and elevated borrowing limits as compared to unsecured loans. One caveat is that if you are not in a position to honor your obligations based on the agreed terms and conditions, the lender will have recourse to your collateral. The lender may sell it in order to pay off the loan.

Unsecured Loans

loanThese types of loans consist of purchases of credit cards, personal loans or educational loans. This type of loan attracts a high interest rate because one does not have to part with his or her property as collateral. In order to determine whether you can pay an unsecured loan, the lender will base his or her judgment on your financial resources. In this judgment, character, collateral, capital, condition and capacity form the threshold of deciding whether to loan you the money or not. The lender is interested with the willingness and ability of the borrower to repay the loan. However, you do not have to worry that the lender will take your valuable possession in case you default on the repayment of the loan.