Your Retirement Center: Secured and Unsecured Loans, Fixed and Adjustable Rate

- Money Magazine Article
- Fortune Magazine Article

Loans

You can arrange to borrow and repay the money you need for specific expenses.

When you need money to buy a car, pay college tuition, fix up your home, or anything else that requires an immediate cash outlay, you're often able to borrow the amount from a lender such as a bank, credit union, or mortgage company. If you know how different types of loans work and the particular features they offer, you'll be in a better position to look for the one that will be best suited for you.
In some ways, of course, all loans are alike. You borrow money, called the principal, and agree to pay it back over a specific term, or length of time, with interest. But the conditions of the loan, some of which are listed below, can affect how much you can borrow and how much the loan will cost you.

The term of the loan

Whether the interest is fixed or adjustable

Whether the loan is secured or unsecured

INSTALLMENT LOANS When you take an installment loan, you borrow the money all at once and repay it in set amounts, or installments, on a regular schedule, usually once a month. Installment loans are also called closed-end loans because they are paid off by a specific date.

SECURED LOANS Your loan is secured when you put up something of value, called security or collateral, to guarantee you'll repay what you owe. The lender can repossess the collateral and sell it if you default, or fail to repay. Car loans and home equity loans are the most common types of secured loans.

THE COST OF BORROWING

Monthly payments for 5 years	$386.66
Total payment	$23,196.60
Total interest paid	$3,196.60

UNSECURED LOANS An unsecured loan is made solely on your promise to repay. If the lender thinks you are a good risk, nothing but your signature is required. However, the lender may require a co-signer, who promises to repay if you don't. Since unsecured loans pose a bigger risk for lenders, they may have higher interest rates and stricter conditions.

FIXED INTEREST RATE Many installment loans have a fixed interest rate. The interest rate and the monthly payments stay the same for the term of the loan.	VS.	ADJUSTABLE INTEREST RATE An adjustable-rate loan has a variable interest rate. When the rate changes, usually every six months or once a year, the monthly payment changes also.
Advantages Installments stay the same Easier to budget payments The cost of the loan won't increase No surprises		Advantages Initial rate usually lower than fixed rate Lower overall costs if rates drop Annual increases usually controlled
Disadvantages Interest remains the same, even if market rates decrease Initial rate usually higher than adjustable rate		Disadvantages Vulnerable to rate hikes Hard to budget for increases Not always available

USING A LINE OF CREDIT


   $ 10,000 Line of credit
 - $   6,000 You borrow
__________

= $  4,000 Available credit
+ $  1,000 You repay
__________

= $  5,000 Available credit

Advantages

Only one application
Regular access to credit

Disadvantages

Potentially higher interest rates than other loans
Easy to over-borrow

LINES OF CREDIT A personal line of credit is a type of revolving credit. It lets you write special checks for the amount you want to borrow, up to a limit set by the lender. The credit doesn't cost you anything until you use the money. Then you begin to pay interest on the amount you borrowed. You must repay at least a minimum amount each month plus interest, but you can repay more, or even the whole loan amount, whenever you want. Whatever you repay becomes available for you to borrow again.

Banks and credit card issuers sometimes offer lines of credit automatically to people they consider good customers. That doesn't mean you have to use your line of credit if you prefer not to.

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