Types of loans

Understanding the differences between certain terms and types of loans is a big help when you're ready to borrow. The loan can be a secured loan or an unsecured loan.

The secured loan will be secured against any collateral e.g. fixed term deposits or Govt. Bonds. In case of Home Loan, the mortgage on the property acts as the collateral or security for the loan.

If you don't make payments and default on the loan, the lender can repossess the collateral — your house in the case of a mortgage, your car in the case of a car loan. The fixed deposit or the govt. bond that has been liened as collateral can be liquidated if you default on the loan.

An unsecured loan — called a personal loan — on the other hand, isn't guaranteed by any collateral. Your promise to repay is the only basis on which the lender makes the loan. Since the lender is taking a bigger risk, the interest rate may be higher, or you may be asked to find a guarantor who agrees to pay the loan if you default.

The term of the loan 

Whether your loan is secured or unsecured, it will have a term, which means how many months or years you'll have to repay the loan. The longer the term, the smaller each payment will be. But the tradeoff is that the longer you take to pay the money back, the more you'll pay in interest. You'll have to weigh the extra cost against how much you can comfortably afford to pay each month.