Unsecured loans are not backed by any collateral. You borrow money on the strength of your good credit and ability to repay alone.
Revolving vs. Installment Loans
Revolving and installment describe the amount of time you have to pay back a loan. With a revolving loan, you have access to a continuous source of credit, up to your credit limit. You repay only the amount of the credit you use, plus interest on the unpaid amount. You may re-borrow the principal you’ve repaid. So the loan could remain “open” for years.click here for more info
With an installment loan, you pay an agreed amount, which includes principal and interest, every month. Each payment reduces the balance of the loan until it is paid off. There is a fixed ending date, known as the term of the loan.
Fixed vs. Adjustable Interest Rate Loans
Fixed interest is just that. You and the bank agree to a certain interest rate and it remains constant throughout the term of the loan. Fixed interest rates give you the stability of always knowing what your payment will be, so you can budget accordingly.
Adjustable or variable rate interest fluctuates. Usually it is pegged to the Prime Rate – the interest the U.S. Treasury charges to its best borrowers. When the Prime Rate is high, such as during a period of inflation, you pay more. When the Prime Rate is low, such as when the government is trying to stimulate the economy during a recession, you save on interest. If you need to borrow during a period of high interest, your payments will drop once the Prime Rate drops.