Whats The Difference Between An Unsecured And Secured Line Of Credit?

When many homeowners or business owners need to borrow money

, either for emergencies or to help with routine expenses, one of the first forms of loans they consider are lines of credit. And when they start shopping around for different loans, they quickly find out there are two different types: unsecured and secured lines of credit. So whats the difference? And what will you need to be eligible for them?

An unsecured line of credit is a simple loan in which you apply for a certain amount of money that will be available to you through a revolving line of credit, much like a credit card. To get this type of loan all you need to do is apply, but because the lender is giving you money in good faith, unsecured lines of credit usually come with a lot of restrictions and fees. You generally wont get as much money as you would with a secured line of credit, and you will probably also need an impeccable credit score. Even with that, the interest rates on unsecured lines of credit are much higher than those on secured lines of credit.

A secured line of credit is just that its still a line of credit that works much like a credit card but its secured with some form of collateral. For business owners, that collateral could be their accounts receivable, expensive equipment, or other inventory. If the business owner defaults on the loan, the lender will have the right to this collateral. When homeowners apply for a secured line of credit, they typically put up their home as collateral. And if they default, the lender can foreclose on the home.

Because business owners and homeowners alike are putting up extremely valuable possessions as collateral, the terms of a secured line of credit are generally much better than that of an unsecured line of credit. The interest rates are generally lower, especially in the case of a HELOC (home equity line of credit,) as these loans are mostly based on the amount of equity the homeowner holds.

The interest rates on secured lines of credit are usually much, much lower than those found on credit cards, and thats one of the features of them that makes them so attractive to so many people. In addition to that, most secured lines of credit also come with interest-only payments due for the draw period, the time in which you can simply draw from the line of credit and use the money as you need. After that time, principal payments may be added to the monthly payment, or the loan may turn into a fixed-rate loan. This latter case is most typical when the secured line of credit has borrowed against home equity; once the term is over the loan will sometimes turns into a fixed-rate home equity loan.

Many lenders have different packages for all the different types of secured lines of credit available; and theyll all have their own advantages and disadvantages that come with them. When you think its time to apply for a secured line of credit, make sure you contact a financial professional or a mortgage broker to make sure that you get the best rates, and the best deal.

by: Bryan.J

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