Part 1 of Our Mini-Series on Secured and Unsecured Loans

I know this article is obviously not specific to Ohio only, but this article on secured and unsecured loans (and debt), is food for thought for anyone who wants to come by for a read.  Onward.

There are two basic kinds of debt. First, there is secured or collateralized debt. This means that you have agreed with your lender that some asset you own, such as your house, your, or your furniture, will serve as collateral to secure a loan. If you fail to repay the loan, the lender can take the asset to satisfy the debt. The second kind of debt is unsecured or non-collateralized. In this case your borrower and is based purely on your promise to pay back the loan. Examples include line of credit loans, overdraft protection, credit cards, and demand loans (loans that you are required to pay back whenever the lender asks you to).

In general, secured debt carries a lower interest rate because the lender is not risking as much by loaning you the money. After all, the lender can get your collateral in return if you default on your loan payments. Credit cards, which typically are unsecured, and other unsecured loans generally have a higher interest rate because the lender is less likely to recover the value of the loan and may have to spend more to do so if you do not make your payments. Keep in mind, however, that in some circumstances a lender can still go after your property if you do default on and unsecured loan.

The largest debt (secured or unsecured) you will likely ever have is a mortgage on a house; mortgages are always set up with your house as collateral because very few people can borrower that much money based simply on a signature and promise to repay. When you buy a home in Ohio and take out a mortgage, it is called a first mortgage because your lender has the first dibs on your property if you do not make your monthly payments. Even if you refinance at some point, you will usually still end up replacing a first mortgage with a first mortgage.

There are also home equity loans and home equity open-ended loans, or revolving lines of credit, which, if you have a first mortgage, are considered second mortgages on your home. You may, for example, take out such a loan to remodel your kitchen, consolidate your credit card debts, or buy a new car. These loans are called second mortgages because if you default on all your home loans, the first mortgage holder has priority over the home equity or line of credit lender for repayment. I know of a situation where a house was foreclosed on and then sold; the sale price was less than the amounts due the first mortgage lender and home equity lender. The bank holding the home equity loan got only what was left over after the first mortgage was paid. There are key differences between of home equity loan and an open-end line of credit. With a home equity loan, you borrower on the for a fixed period of time, and if it has a fixed interest rate, you pay the same amount on it every month.

With a home equity open-end line of credit, the amount of the loan and the amount of your monthly payments will depend on how you use the line. For convenience sake, it is great to have a home equity open ended line of credit, but since you can draw against it simply by writing a check against the credit line, it requires self-discipline not to use it for frivolous things. I know of a situation in Akron, Ohio where a home equity line was used for vacations, clothing, and even a new dog. I hope that was a really nice dog.

This article on continues on unsecured and secured loans in Ohio part 2.

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