What family has not gone into debt to buy a home or a car. If you have not had the need before, the time will probably come when you want to buy a house and need to get a loan.

When that time comes you will need to learn about two different types of loans - secured or unsecured. What are the differences between these two types of loans and what are the pros and cons of each for the borrower and for the lender?

A secured loan is one in which the money borrowed is guaranteed to be repaid or some asset will be forfeited. The most common example is a home loan. The borrower agrees to repay on the terms of the contract, and if he or she defaults, the lender can legally claim the home as compensation.

In theory, that means that if you miss one payment on the home loan, the lender has the legal right to foreclose and sell the property. In practice, that never happens. Among other reasons, lenders know that reclaiming a house is a long, unpleasant chore and they would be left with the necessity to sell the home to recoup the money.

No lender is going to do that for such a small misstep as missing a single payment. Even if the borrower lags by several months, at most the lender will typically send a series of firm letters demanding payment before taking any other action.

Nevertheless, it's wise to realize that the lender has this right, so it is wise to make the monthly payment on time.

There are other differences between secured and unsecured loans that borrowers should be aware of. Since the money in an unsecured loan is not, in theory, backed by the right to seize the asset in case of default, the interest rates on them are usually higher.

The lender in that case is taking a larger risk, and they are compensated by charging higher interest. That covers losses from defaults (which are higher on unsecured loans) and is one way to change borrowers incentives. Most people will try much harder to meet a debt that is tied to their home than for an unsecured loan.

So, there are pros and cons for both borrower and lender to obtaining one type of loan versus the other. As a borrower, you may find it necessary to incur a higher rate of interest if you don't have a home, bonds or other assets to offer as collateral. Or, you may simply want not to put those at risk.

Basically it is up to you to decide which type of loan is best for your situation. Whether you apply for a secured or an unsecured loan, the most important thing to keep in mind is that the payments are low enough so that you will not have any difficulty making the monthly payments.