Credit is a powerful tool that comes in several forms. It allows you to buy now with the promise of paying later. By understanding how each works, you’ll learn to manage credit successfully and use it to your advantage.
Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. You can also get a credit limit linked to your checking account that gives you bounce-proof protection in case you write a check for an amount that exceeds your account balance.
Loans are generally divided into two types: secured and unsecured.
- Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount
of the loan, such as a car, home or cash deposit.
- Unsecured loans do not require collateral and are made based on your credit score and ability to repay.
Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specific period of time. The interest charges are included in the payments. Auto loans and mortgages are examples of installment loans.
Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is repaid.