At one time or another almost everyone needs to apply for a loan. Sometimes the need is immediate and critical, like replacing the furnace in a home. Other times it’s for a future event, like a wedding or honeymoon trip. No matter what the reason, it’s important to understand the differences in loans. There are two main kinds of loans, secured loans and unsecured loans.


Secured loans are loans that are backed by valuable collateral. The collateral is at least equal to the amount of the money being lent. An automobile loan is backed by the vehicle. A home loan or mortgage is backed by the house and property. In both cases the collateral is at risk if the borrower fails to make payments. The lender then has the right to seize the property and sell it to recover the balance due on the loan.  Because the lender takes less of a risk when a loan is backed by something of value, secured loans usually carry a lower interest rate and have easier repayment terms. More money can be borrowed with secured loans.

Unsecured loans are just the opposite. The lender is taking more risk because there is no collateral backing the loan. If the borrower defaults on payments, the lender has to pursue the matter in civil court and get a judgement. If the borrower still doesn’t pay, the lender is out the money lent. Unsecured loans usually have a higher interest rate, stricter terms and conditions, and are for smaller amounts than secured loans.

Mortgage refinances are examples of secured loans. Refinancing a mortgage changes the terms of the original mortgage , but the home is still offered as collateral.  Refinancing is a way to borrow money against the equity that has been built in the home since the original mortgage was given. Money used from refinancing is used in much the same ways as personal or even business loans. Many small businesses have been started using money from refinancing a mortgage. Refinancing is often used to get cash out for home improvements. Refinancing isn’t always done to borrow money. Sometimes it is done to get more favorable terms or a lower monthly payment. It is a way to take advantage of lower interest rates or to change from an adjustable rate to a fixed rate mortgage.