There are two main types of loans: loans with collateral and loans without collateral. When you get a secured loan, you put up something as collateral. If you don't pay back the loan according to the terms you agreed to when you got the loan, the bank could take back the collateral.
Unsecured loans don't have anything to back them up. You get money based on your good credit and your ability to pay it back.
Revolving vs. Installment Loans
The amount of time you have to pay back a loan is called the loan's "term." With a revolving loan, you can keep getting credit as long as you don't go over your credit limit. You only have to pay back the amount of credit that you use, plus interest on the rest. You can borrow the money you've already paid back. So the loan could be "open" for a very long time.
With an instalment loan, you pay back a set amount each month. This amount includes both the principal and the interest. With each payment, the amount owed on the loan goes down until it is paid off. The loan has a fixed end date, which is called the term.
Loans with fixed or changing interest rates
This is what fixed interest is. You and the bank agree on an interest rate, and it stays the same for the whole loan period. With fixed interest rates, you always know how much your payment will be, so you can plan your budget accordingly.
Adjustable or variable rate interest fluctuates. It is usually tied to the Prime Rate, which is the interest rate that the U.S. Treasury charges its best borrowers. When the Prime Rate is high, like when inflation is happening, you have to pay more. You save money on interest when the Prime Rate is low, like when the government is trying to boost the economy during a recession. If you need to borrow money when rates are high, your payments will go down when the Prime Rate goes down.
Different Loans
Auto loans are secured loans in which the car you buy is used as collateral.
Credit cards are an unsecured loan that gives you a line of credit from which you can borrow money by showing a plastic card to the store owner when you buy something. You can buy more than one thing up to the limit of your credit.
Personal loans are either secured or unsecured loans that are made for a specific reason.
Mortgages are a type of secured loan in which the house you buy is used as collateral.
Home Equity Loan: A loan that is secured by your home and for a set amount. In some cases, you may be able to write off the interest on this loan on your taxes. Talk to your bookkeeper.
Home Equity Credit Line: A line of credit that is secured by your home and can be used over and over again. In some cases, you may be able to deduct all or part of the interest on this loan from your taxes. Talk with a tax expert or your accountant.
Home Improvement Loan: A secured loan for a fixed amount that uses your home as collateral. The money can only be used to fix up the house. This loan's interest might be tax-deductible. Talk with a tax expert or your accountant. (In some parts of the country, you might not be able to get a loan for home improvements that is "secured by the value of your home." In these places, you could get an unsecured home improvement loan.)
Student Loan (Stafford Loan): A loan from the U.S. government to pay for college. The school gives the student the loan. While the student is still in school, payment is put off.
Personal lines of credit are unsecured loans that let you borrow up to a certain amount.
