What Is the Difference Between a Credit Card Loan
and a Secured Loan?
A loan can be either secured or unsecured. A secured loan is backed by an asset that you own such as a house or a car. If you are unable to make payments, the lender can take ownership of that property. This helps protect lenders from the risk of losing their money.
In contrast, an unsecured loan is not backed by property. As a result, if you default, the lender may be unable to recoup its loss. For that reason, unsecured loans usually have higher interest rates and require frequent monitoring of the consumer’s credit usage. Most credit card companies issue unsecured loans. They also protect themselves from the risk that people may make late payments or skip them altogether by using a system of credit limits, interest rates and fees.
The first step credit card issuers take is to assess whether or not to make the loan. They do this by reviewing your credit score, which is a three-digit number that represents your current likelihood to repay, as well as your full credit history. They also use a scoring system that analyzes how you’ve repaid loans in the past and indicates your ability to pay back future loans. In addition to reviewing your full credit history, issuers typically review your application and may verify certain information, such as your employment status.
If you are approved for a credit card, card issuers will set your credit limit, which is the maximum amount that you can charge on your card. The issuer will also determine your Annual Percentage Rate (APR), which is a periodic interest rate that determines the finance charges you pay on your account if you carry a balance. Finally, if your account is past due, you will be subject to late fees, which are designed to encourage you to pay on-time.
Without these provisions in place, lenders would not be able to provide consumers with unsecured loans, which would ultimately impact borrowers’ ability to obtain credit when they need it most.Back to Straight Talk Back to Top