Credit falls into four major categories: closed-end vs. open-end and secured vs. unsecured.
Closed-end debt includes personal loans, student loans, most mortgages, and car loans. You borrow a specific amount of money and make regular, consistent monthly payments over an agreed-upon period of time to pay it back.
Open-end debt is also known as revolving credit, like credit cards and lines of credit. You can access the money at will and repay it based on what you borrow.
Unsecured debt is granted based on your promise to repay it. Creditors generally take into account the “4 C’s” of consumer credit when determining whether to grant credit, how much, and at what rate. These include credit (your payment history), capacity (your ability to repay based on your income and other debts), character (a subjective measure of your ability and willingness to repay the debt), and collateral (assets that a lender can possess if a borrower defaults on the loan).
Secured debt is a loan made with an asset, such as a car or a house, as collateral. This collateral secures the loan; if you don’t pay it, the creditor can seize the asset. Because there is less risk to the creditor, most secured loans have a better interest rate than unsecured loans.