Understand The Types Of Loans

Key Takeaways

Loans can be unsecured or secured with collateral
Unsecured loans have higher interest rates
Term loans have a fixed repayment period, while revolving loans are repaid based on usage
Your assets can be used to pay back a defaulted loan

Loans can be secured or unsecured

There are some important differences between secured and unsecured loans:

Secured loans	Unsecured loans
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.

Comparing term and revolving loans

The main features of term loans and revolving loans are shown below:

Feature	Term loan	Revolving loan
Loan tenure	Fixed	Short-term revolving
Interest rate charged	Usually lower than revolving loan	Usually higher than term loan
Interest rate type	Can be fixed or variable	Can be fixed or variable
Recallable on demand?	No (unless in the event of default)	Yes
Loan can be tapped on after payback?	No	Yes
Fixed instalment payments	Yes	No
Repay anytime?	No	Yes