Secured and Unsecured
If you look over loan descriptions, two descriptions you will see frequently appear are "secured" and "unsecured." The "security" of a loan refers to how lenders see the debt. Loans that are secured have collateral backing them up – an asset, usually tangible, with real world value that can be used to recover money lent if something goes wrong and the borrower defaults. Unsecure loans, meanwhile, do not use collateral to back up the loan, which increases the risk for the lender.
So which is a good option for you? That depends on what you are looking for: Unsecured loans are often faster and easier to get, but in return the interest rates and fees are often higher. Secured loans may have more favorable terms, but the process is often lengthier.
Open-End Credit (Lines of Credit, Credit Cards, etc.)
There's another way of dividing credit – as open-end and closed-end. Open-end credit allows you to withdraw money as you need it, over an extended period of time. Two common options here are lines of credit and credit cards, which work in similar ways. The advantage here is that you can immediately withdraw smaller sums of money for individual expenses as you work on a business project, travel through a foreign country, and so on. Additionally, interest rates don't usually apply to money that is not withdrawn from the account.
Closed-End Credit (Appliance Loans, Consumer Loan, etc.)
This credit option gives you a set sum of money upfront, which you then repay, plus interest, in continuing installments – what most people think of if they think about a traditional loan. Single payment loans, which require full repayment plus interest in one sum, are also in this category. The obvious advantage here is that you receive a lump sum of money immediately to make large payments or purchases. However, you also need careful financial control to ensure you can pay the loan back in the future.
