Secured Loans vs Unsecured Loans

Essentially, there are two types of loans: secured loans and unsecured loans. Secured loans are loans where you pledge some kind of collateral. The bank might repossess the collateral if you don't repay the loan according to the terms you agreed to when you took out the loan.

Unsecured loans, however, aren't backed by any collateral.  You borrow money on the based on the strength of your good credit and ability to repay alone. 

Revolving vs.  Installment Loans 

Revolving and installment describe the amount of time you have to pay back a loan.  With a revolving loan, you have access to a continuous source of credit, up to your credit limit.  You repay only the amount of the credit you use, plus interest on the unpaid amount of the loan.  You might re-borrow the principal you have repaid.  So the loan can stay "open" for years. 

With an installment loan, you pay an agreed amount, which consists of principal and interest, each month.  Each payment decreases the balance of the loan until it is paid in full.  There is a fixed end date, called the term of the loan. 

Fixed vs.  Adjustable Interest Rate Loans 

Fixed interest is just that.  You and the bank agree to a certain interest rate and it remains steady throughout the term of the loan.  Fixed interest rates offer you the constancy of always knowing what your payment will be, as a result, you can budget accordingly. 

Adjustable or variable rate interest varies.  Generally it is pegged to the Prime Rate - the interest the U.S. Treasury charges to its best borrowers.  If the Prime Rate is high, for instance during a period of inflation, you pay more.  When the Prime Rate is low, such as when the government is trying to stimulate the economy through a recession, you save on interest.  If you have to borrow in a time of high interest, your payments will drop when the Prime Rate drops. 

Types of Loans 

Car Loans: A secured loan where the car you will be purchasing is used as the collateral. 

Credit Cards: A credit card is an unsecured loan in form of a plastic card which allows you a line of credit against that you might borrow by presenting it to the merchant from whom you are purchasing the item.  You can make multiple purchases, up to your given credit limit. 

Personal Loans: Loans made for a fixed purpose and can be secured or unsecured. 

Mortgages: A secured loan where the collateral is the real estate you buy. 

Home Equity Loan: A secured loan for a fixed amount where your home is used as collateral.  In some cases, the interest on this loan might be tax deductible.  Contact your accountant. 

Home Equity Credit Line: A secured, revolving line of credit where the collateral is your home.  In certain situations, the interest on this loan or a portion of it may be tax deductible.  See a tax professional or your accountant. 

Home Improvement Loan: A secured loan for a lump sum fixed amount where your home is used as the collateral.  The money might only be spent on home improvements.  The interest on this loan could be tax deductible.  Consult a tax professional or your accountant.  (In certain areas of the country, a home improvement loan "secured by the equity in your home" might not be available.  In these areas, an unsecured home improvement loan would be available.) 

Student Loan (Stafford Loan): A loan for college expenses underwritten by the U.S.  Government.  This loan is granted to the student.  Payment is deferred while the student is still in school. 

Personal Line of Credit: Unsecured loans giving you access to funds up to a fixed credit limit.