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Credit allows us to borrow money to pay for items we couldn’t otherwise afford — like homes and cars and a college education. Mortgages and vehicle loans are examples of secured loans. The lender uses your home or car as collateral, and if you fail to pay back the amount borrowed in the allotted term, the lender can reclaim the item.
Unsecured loans are not backed by any type of collateral. You simply promise the lender that you’ll pay back the loan. This affords you some freedom in borrowing — you can use the funds to pay for a computer, a vacation or anything else you’d like. But that freedom comes with a price: higher interest rates than secured credit.
Types of Unsecured Loans
Three common types of unsecured credit are:
Credit cards. A form of revolving credit, the card issuer approves you for a set amount (your credit limit) and you access the credit whenever you need it. The lender charges interest on the balance each month and asks that you pay off a portion of the balance regularly.
Personal loans. Personal loans let you borrow a set amount of money at a particular interest rate, then pay it back in a series of fixed payments.
Personal lines of credit function very similar to credit cards, except the funds can be accessed by check, online transfer or withdrawal rather than a card.
When Unsecured Credit Makes Sense
While a personal loan may come with a higher interest rate than a secured loan, it offers a smart alternative to riskier forms of borrowing, like payday or pawn shop loans. Finance companies may charge excessive interest rates and their loans may come with unreasonable terms.
What’s more, a personal loan can help build your credit history and enhance your ability to qualify for better loan rates and terms in the future. Making payments on time and managing your loan responsibly hows lenders you’re a smart credit consumer, and may make lenders more willing to extend a loan in the future.
To learn more about how a Navigator Credit Union credit card, personal loan or personal line of credit can help improve your financial picture, talk to a representative today.