Undertanding the Different Types of Credit

Installment Loans and Lines of Credit

• Installment loans give you a lump sum of money up front, repayable in steady monthly payments with predetermined repayment terms, such as a fixed interest rate. Car loans and mortgages are installment loans.

• Lines of credit allow you to borrow up to a certain amount any time you want and generally offer flexible repayment terms. Credit cards offer a line of credit. With both types of credit, the maximum amount you can borrow, or credit limit, depends upon your credit score, income, and other factors that determine your ability to repay.

Secured Versus Unsecured Loans

• Secured credit is backed by property you own. Like a car loan. If you don't pay your car loan, the creditor can take your car. This is also the case for home equity loans and mortgages, which are tied to a house. Secured credit is usually less expensive than unsecured credit, but you should consider whether you can afford to lose the property you use to secure the credit in case you experience difficulty paying back your loan.

• Unsecured credit, like that offered by credit cards, will usually cost more, but will not place your personal property at risk, except under certain circumstances (e.g., if you file for bankruptcy).

Loans are Contracts and Carry Important Responsibilities

• Understand your responsibilities. Just like with any contract, you need to understand the responsibilities and the consequences if you fail to meet what's required of you. Even a few missed or late payments can affect your credit record and make it harder to get loans in the future and make them more expensive.

• If you find yourself having difficulty repaying your loans, you should act right away to address it. The worst mistake people make is ignoring the problem or hoping it will go away. It won't. Dealing with it early is the best course of action. Below are some warning signs of problems. Financial stress test.