Many people do not realize there are different types of credit. They believe mortgages, home equity credit lines, personal loans, car loans and credit cards are all basically the same. There is actually an important difference. Some of these accounts are known as secured credit, while others are unsecured. You should know what those terms mean, and the characteristics and advantages of each type. This will help you choose the right kind of credit when you need to get a loan or open a new account.
Definition
Secured credit refers to a loan that is guaranteed by a home, property or an item like a car, recreational vehicle, boat or something similar. The item can be taken by the creditor if the borrower doesn't pay the loan back as agreed. Unsecured credit refers to a loan or account that is not guaranteed by anything other than the borrower's agreement to pay it back. The lender cannot seize anything if it is not repaid unless he goes to court and gets a judgment that lets him put a lien on the borrower's property.
Benefits
Each type of credit has its own benefits. According to Thinkmoney.com, you can usually borrow a higher amount of money when a loan is secured and pay it back over a longer time period. The interest rate is often lower because of the lower risk for the lender. Secured credit may be granted even if you have a low credit score because the loan is guaranteed by collateral. Thinkmoney.com explains that one big advantage of unsecured loans is that you don't need an asset to take out the loan and you don't directly risk losing an asset if you cannot repay it.
Examples
Home mortgages and car loans are two of the most common types of secured credit. The home or car acts as security for the loan. A home can be foreclosed on and a car can be repossessed if the borrower doesn't make the payments. Credit cards are the most common type of unsecured credit. You can purchase whatever you want, as long as your credit limit is high enough, and the items you purchase cannot be taken back if you don't make your payments.
Alternative
Even though credit cards are usually unsecured, you can get a secured account if you have bad credit and cannot qualify for one otherwise. You must put your own money into a bank account, Bankrate.com explains, and your credit limit will equal your deposit which is typically a minimum of $300 to $500. You give the card issuer permission to take the money if you do not pay the account. According to Bankrate.com, the interest rate on secured cards is generally higher and they often have an annual fee and service charges.
Warning
You may only be able to qualify for secured credit if you have a bad credit history. Lenders don't like to take the higher risk of giving you unsecured credit if your history shows you might not pay back the loan. They don't have much recourse to get their money back, other than turning the account over to a collection agency or going through the time and expense of suing you, which still does not guarantee that the money will be repaid.
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