Secured or unsecured loan
- Assets such as a property are pledged to the lender as collateral
- If the value of the collateral falls below the loan amount, the borrower may have to top up with more assets or pay down some of the outstanding loan amount
- If the loan is not repaid, assets can be repossessed and sold to recover the loan
- Examples: housing loans, car loans
- Assets are not pledged as collateral
- Interest rates tend to be higher
- Examples: credit cards, overdraft, personal lines of credit
Term versus revolving loans
With a term loan, you must repay the loan by instalments over the loan period. The bank can recall the loan if you breach the terms of the loan agreement. The loan is usually larger in amount and has a longer repayment period.
Examples: housing loans, car loans and education loans.
Revolving loans allow you to use the money up to an agreed credit limit whenever you need it. Once you repay the amount owed, the credit becomes available to draw on again.
Examples: bank overdrafts, personal lines of credit and credit cards.