There are several basic types of credit. By understanding how each works, you will be able to get the most out of your money and avoid paying unnecessary charges.

	Secured loans are guaranteed by a collateral that is equal in value to or more than the amount of the loan, for example, a property or a car. Thus, examples of secured loans are mortgages and auto loans.

A lender seeks collateral backing for a secured loan in case of the borrower's inability to pay. If a borrower cannot keep up with his loan arrangement and repay his loan, he may be forced to sell his collateral to pay off part, or all, of his debt. In addition, any shortfall will be recovered from him. This may mean that he also has to sell off other assets to repay the debt.

Lenders generally view this as a last resort and will try their best to help the borrower make his repayments, possibly even under a new repayment arrangement.

Nonetheless, it is important for the borrower to be certain from the onset of the loan that he can maintain his loan repayments throughout the loan period.

	Unsecured loans do not require collateral and are made based on several criteria including your income, credit history, credit score and ability to repay. An example of such a loan would be a term loan or line of credit.

In an unsecured loan, the lender is providing the loan based on an expectation that the individual will repay the loan – this will usually involve an assessment of the borrower's income and credit history.

Since an unsecured loan does not require collateral, the loan may charge a higher interest rate than a secured loan. This is to compensate the lender for the additional risk it is taking by not asking for collateral.