There are four major types of credit, each with its own unique qualities. It is worth becoming familiar with these types, as chances are you will encounter each at some point during your lifetime.
Secured, closed-end. The term "secured" is used when there is physical property, or collateral, backing the loan, and "closed-end" means that the loan carries specific payments and lasts a specific period of time. Examples of this type of credit would be a home mortgage or auto loan. If the borrower were unable make the payments on this debt, the bank or lender would have the right to repossess the house or the auto backing the loan.
Secured, open-end. Similar to a credit card, this type of credit is revolving; however, it is also secured with physical property such a house. The most common example would be a home-equity credit line. Usually, only payments of interest are due on this loan, and the borrower chooses when to make payments on the principal balance of the loan.
Unsecured, open-end. As discussed above, "unsecured" means that there is no physical collateral backing the loan. In this type of credit, the bank or lenders feel that the borrower's credit-worthiness is sufficient to grant him or her a loan without collateral. The common example of this type of loan is a credit card. In exchange for the lender's lack of collateral or asset backing the loan, the lender will usually charge a higher interest rate, which is why credit card interest rates are usually much higher than home mortgages or auto loans.
Unsecured, closed-end. Probably the most uncommon of the four, this type of credit is extended without assets or collateral backing the loan, however, specific payments of principal and interest must be made and the loan lasts a specific period of time, unlike credit cards.
Secured, closed-end. The term "secured" is used when there is physical property, or collateral, backing the loan, and "closed-end" means that the loan carries specific payments and lasts a specific period of time. Examples of this type of credit would be a home mortgage or auto loan. If the borrower were unable make the payments on this debt, the bank or lender would have the right to repossess the house or the auto backing the loan.
Secured, open-end. Similar to a credit card, this type of credit is revolving; however, it is also secured with physical property such a house. The most common example would be a home-equity credit line. Usually, only payments of interest are due on this loan, and the borrower chooses when to make payments on the principal balance of the loan.
Unsecured, open-end. As discussed above, "unsecured" means that there is no physical collateral backing the loan. In this type of credit, the bank or lenders feel that the borrower's credit-worthiness is sufficient to grant him or her a loan without collateral. The common example of this type of loan is a credit card. In exchange for the lender's lack of collateral or asset backing the loan, the lender will usually charge a higher interest rate, which is why credit card interest rates are usually much higher than home mortgages or auto loans.
Unsecured, closed-end. Probably the most uncommon of the four, this type of credit is extended without assets or collateral backing the loan, however, specific payments of principal and interest must be made and the loan lasts a specific period of time, unlike credit cards.
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