By Sabrina Karl

If you’ve heard the term “unsecured loan”, or perhaps “secured credit card”, you might be wondering what these terms mean. Fortunately, it’s pretty straightforward.

Loans, including lines of credit, come in two flavors: secured and unsecured. A secured loan involves designating an asset of yours as collateral, which the lender can take possession of should you fail to pay off the loan.

The most common types of secured loans are mortgages and auto loans, in which the house, property, or vehicle becomes part of your obligation to repay. Because any failure to repay enables the lender to take ownership of the collateral, these loans provide more “security” to the lender, and as a result, generally carry lower interest rates than unsecured loans.

In contrast, an unsecured loan is just what it sounds like: a loan agreement with no security collateral. Credit cards, personal loans, and student loans are all unsecured in that your approval for the loan or line of credit is based on your creditworthiness. The better your credit rating, the lower the interest rate you’ll receive, and vice versa.

As you’d expect, lenders charge more for loans that are unsecured, as they have less recourse should you fail to repay the debt. That’s why the rates on credit cards and personal loans are typically much higher than what you see for mortgages and auto loans.

One hybrid product is a secured credit card, which can be useful for those with poor credit. Unlike a conventional card account that extends a line of credit and trusts you’ll pay back what you charge, a secured card requires making an upfront cash deposit, which serves as collateral. Like a security deposit on an apartment, if you close the secured card account on good terms, the cash deposit will be refunded to you.