A loan is money that you borrow and must repay with interest. It’s a contractual promise between a borrower and a lender; the borrower agrees to repay a sum of money (generally with interest) in exchange for the lender giving another sum of money.
There are 2 main loan types available. They include:
Unsecured Loans
Unsecured loans require no collateral. Lenders will approve unsecured loans based on income and credit history and score. Your interest rate is usually dependent on your credit score with higher rates for those deemed higher risk. Examples of unsecured loans include personal loans, debt consolidation loans, student loans, and any purpose loans.
Secured Loans
Secured loans require collateral. It’s tied to an asset that can be seized and sold in the event of loan default. These loans are auto loans tied to a vehicle, home loans tied to a house, or a secured personal loan tied to a savings account. Rates are usually lower compared to unsecured loans because of the asset used to secure the loan.
With both loan types, the rates can be fixed-rate or variable rate loans. A fixed-rate loan will not have rates fluctuate. They are fixed for the life of the loan. Your rate and payments will stay the same until the term and balance are paid off. The rates on a variable rate loan can rise and fall depending on market conditions but usually capped. Because rates can fluctuate during the term of the loan, you might receive a lower rate in the beginning. An adjustable-rate mortgage (ARM) is a popular variable rate secured loan.
