What is the difference between a loan and a line of credit? Secured vs. Unsecured?
Answers:
A line of credit works like a credit card in the sense that you have a credit limit and can borrow as needed and pay at least a minimum payment based on your balance. A loan usually refers to borrowing a fixed amount at one time and paying a set amount each month for the term of the loan. Secured means the loan is backed by a specific asset that the lender can take if you don't make the payments.
A loan is when you physically acquire a set amount of money; a line of credit is only an authorization to use a certain amount of money, that's not in your possession. Once you use the credit, then it becomes due like a loan.
Secured vs. unsecured means whether or not the loan/credit is backed up by something you own. A home loan is secured because if you quit paying, they can take your house. A credit card or personal loan is unsecured, because if you don't pay it, the lender can't really take anything from you. (easily.)
A loan is a fixed amount that you borrow with a fixed payment for a certain amount of time. A line of credit is a certain amount of money that you can borrow up to at any time and you pay only the interest on it, like say to buy vehicles that you are going to resell. You pay only the interest until you sell the car, and then you pay off the principal amount and free up the balance of the line of credit. Secured means that the lending institution has collateral, something they will take if you don't make the payments, like a car or house. Unsecured means basically a signature loan, where they don't have anything to take if you default. You have to have very good credit to get an unsecured, or signature loan.
Difference between a loan and line: The loan is a fixed rate and after it's paid off it's also closed and not available for use. The line is adjustable and it's revolving (like a credit card). When you pay if off completely the entire line is available to you.
Secured vs. Unsecured: For a secured loan the lender require a substantial amount of collateral so it the event of a default in payment your asset will be seized. Unsecured loan is again like credit card. If you don't pay they can't take anything from you (it's sent to collection agency instead)
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