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Types of Credit


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TERMINOLOGY

There are many types of credit available to help you finance a purchase. When you buy a car, you use a secured loan with the car as collateral. A mortgage is another type of secured loan. You can often get an unsecured loan for a purchase. There is no collateral on this kind of loan. Credit cards are another type of credit. The interest rate you pay on any type of credit you obtain depends on your financial strength, and whether or not you supply any collateral.

Secured Loans

Secured loans are installment loans that you pay monthly. Homes, cars, stocks and other assets are widely accepted as collateral by lenders. The rate you pay depends on the loan-to-value ratio and the strength of your income and credit history.

Unsecured Loans

If you do not have collateral, you can use an unsecured loan for your purchase. This loan is only guaranteed by your signature, which usually means your interest rate is higher since the lender has no assets backing the loan. You must have good credit and strong employment to qualify for an unsecured loan.

Credit Cards

Most credit cards are unsecured types of credit, which is why many carry a high interest rate. The credit card issuer covers their risk with the higher rate.