There are many other types of methods for borrowing cash but all those different financing vehicles can actually be categorized into a “secured” or “unsecured” loan. These are the only two basic kinds of loans that are ultimately available for any borrower. Knowing the difference is important if you want to be wise when it comes to your money. When you start researching personal financing options you’ll quickly learn that there are different ways to borrow money for all sorts of things that you need money for.

Unsecured loans are good for small purchases which you can pay off quickly. Even store credit cards are good to use in some cases because the credit limits are small and the introductory rate are often decent. Unsecured loans are loans which are given to you based on your credit score and not based on any single possession you offer up for collateral. Your credit score is really a measure of your expected ability to pay off debts. If you’ve always paid your debts on time then you probably have a pretty good credit rating. Most credit cards are really considered to be an unsecured type of financing.

Secured loans are a type of loan in which the lending institution has some sort of collateral or item which you own to hold until you pay off the debt. When you finance a car or buy a home with a mortgage the bank technically owns what you bought until you’ve paid off the debt amount with interest. If you default on your loan then the lender can take your collateral and auction it in an effort to regain some of the money you borrowed.

Depending on your tax situation you may even be able to lower the income tax that you owe. There is often a longer delay associated with secured loans because they are so much bigger than most unsecured loans. Common secured loans include house mortgages, new auto loans and most current home updating loans. Secured loans such as home equity loans generally have a lower interest rate, which makes paying them off easier over the life of the loan.

No matter what type of financing you consider remember that you do have to pay the money back and you will be paying interest on the amount that is owed. Plan ahead and be sure you can really afford the monthly payments before you go forward with your loan. Many costly plans are changed when people finally begin to understand how various loans work.