Secured Credit

Secured credit is any purchase backed by collateral (a security pledged for the repayment of a loan). Some item of equal or higher value is pledged to the lender so that failure to repay the loan results in the lender possessing or selling the item as collateral. Collateral used for advanced monies may be a car, jewelry, real estate, a passbook savings account, or any other tangible asset upon which the client and lender agree. This pledged collateral provides the lender the least amount of risk, making this type of loan easier to obtain.

Unsecured Credit/ Credit Cards

Unsecured credit is established when a lender extends credit to a client based upon their ability to repay the loan. No collateral is required, but a finance charge is calculated against the total balance to encourage the client to maintain consistent payments. Because there is no collateral with this type of credit, the lender has a much higher risk and therefore must have higher confidence in a client’ ability to repay. Unsecured credit is based upon the client’s credit history and current financial status. In the case of default, the lender must go to court in order to seize assets and recover the funds.