What is a loan? | Investment
Types of loans
In general, a loan can be secured or unsecured, which means that you may need to pledge a valuable asset to secure the loan. Likewise, loans can be classified as revolving, if funds are accessed on a revolving basis, as needed; or over time, when the loan is disbursed as a lump sum and repaid over a specified period of time.
Secured loans and unsecured loans
Secured loans are secured by something of value, such as a house or a vehicle. If the borrower defaults on the loan, the lender can foreclose, repossess or otherwise seize the collateral to collect the outstanding loan balance. Since these loans pose less risk to lenders, they are generally characterized by lower interest rates.
Auto loans and home mortgages are common examples of secured loans, but lenders can also provide personal loans secured by assets such as a savings account, certificate of deposit, or vehicle.
In contrast, unsecured loans do not require the borrower to pledge any collateral. Here, the lender cannot seize the underlying assets if the borrower defaults. For this reason, interest rates tend to be higher and qualification requirements more stringent. Common examples of unsecured loans are credit cards, student loans, and most personal loans.