Loan terms might be confusing so here’s a short guide you can use to understand the basic concepts.
Secured and unsecured loans
There are just two types of loans: secured and unsecured. Here’s what you need to learn about secured loans:
- Assets like property, vehicles, and jewelry are often offered as collateral to the legal moneylender.
- In case of a default, the collateral is seized or repossessed by the lender.
- If the collateral’s value falls lower than the amount borrowed, the debtor has to pay off the remaining amount or top it up with another asset.
- Most popular examples of a secured loan are housing loans and vehicle loans.
On the other hand, unsecured loans have the following characteristics:
- There’s no collateral needed to get the loan.
- Since there’s no collateral, interest rates are higher.
- Examples of this are credit cards, credit lines, and overdrafts.
Term loans and revolving loans
Term loans are repaid in installments over a fixed timeframe. Larger amounts can be loaned in this manner, and they’re repaid in months or even years. Repayments are made regularly according to the agreed terms. Breaching the agreed loan terms can result with the lender recalling the loan. Education, car, and home loans are the most common examples of this.
Interest rates on term loans are lower when compared to a revolving one. You can choose to have a variable or fixed interest rate on your loans, depending on what’s offered by the lender. You can’t stop a term loan midway unless you default and file for bankruptcy.
On the contrary, revolving loans are short-term and can be used up to the set limit. Popular examples of this are credit cards and overdrafts. Once you repay the outstanding balance, you can borrow from the credit line again until you max it.
Revolving loans have higher interest rates due to their short-term nature. They can’t be paid in installments, but you can repay them anytime you want.
- Secured loans need collateral while unsecured ones don’t.
- Interest rates are higher on unsecured loans compared to secured ones.
- Term loans are long-term debts with a fixed repayment period.
- Revolving loans can be repaid any time after using them.
- Loans on default can be repaid using assets you own.