When considering either personal loans, home loans, or car loans, it pays to know about secured and unsecured loans, as well as loan interest rates and durations.
Secured loans are lines of credit that are guaranteed with personal collateral, such as your car or home. Home loans and car loans are examples of secured loans. If you fail to make a payment on a secured loan, your collateral may be taken away from you. Because the loans are secured against property, the interest rate is typically low.
Unsecured loans, in contrast, are taken out with no collateral. These loans are typically for lower amounts of money and, because they are unsecured, require that you have excellent credit. You may be able to obtain an unsecured loan even if you have bad credit; however, you may end up paying a high interest rate.
Personal loans are probably the best example of unsecured loans. Personal loan interest rates can range from 11-29% and can be paid off in as little as one week or as long as 7 years. Because personal loans often charge higher interest (since there is no collateral), you may be better off using your credit card or applying for a home equity line of credit.
Car loans are typically secured through the car dealer. Car dealer loans do not necessarily carry the lowest interest rate, so many people find better rates through a bank or a third-party lending agency.
Car loans typically span from 1-7 years, and they can also include a time when no interest is charged at all. Once interest does start accruing, it is usually 7-14%. Car loan payments made over a longer period of time require more money to be paid in interest and conversely if your car loan is for a shorter period of time the total amount in interest paid will be lower.
When it comes to home loans, there are two main categories: fixed interest rate and variable interest rate. A fixed interest rate loan is set at the time of the loan and does not change for the life of the fixed rate contract. When this period is up, you may either sign another fixed rate period or revert to the variable rate. In contrast, a variable interest rate loan may, and usually does, change. You may prefer one type of interest rate plan over another depending on current market conditions and interest rates. Interest rates on home loans range from 4.95% - 8%.
Home loans typically have durations of 15, 20, 25 and 30 years. Shorter mortgages will carry the advantage of a lower interest rate, but more money must be paid back to the bank every month. Conversely, longer mortgages require a smaller monthly down payment, but have higher interest rates.
In summary, it will benefit you to know which loan works best for your financial situation and whether the loan is secured or unsecured. Also, remember that different loans have different durations and interest rates.
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