Types of Loans

According to the Oxford dictionary, a loan is anything that is borrowed (especially a sum of money) and is expected to be paid back with interest. Now, Loans are of two types:-

Types of Loans

A. CONSUMER LOANS

Consumer Loans are of multiple types. At one glance it would look like this:

Types of Consumer Loans

1. STUDENT LOANS

Students are offered loans by federal commercial banks for their education. While some students prefer private loans, most opt for federal loans.

Federal loans are of two types:

Subsidized Loans Unsubsidized Loans
Meant for candidate with maximum financial need. Meant for the average student borrower; irrespective of financial stability.

These loans have the same rate of interest for all students.

On the contrary, private companies’ interest rates are dependent on each applicant’s financial situation. Private lenders usually give out loans at a variable rate of interest; meaning succeeding rates increase or decrease in tune with the market rate.

2. AUTO LOANS

These loans are typically taken for purchasing vehicles and automobiles. Popularly known as car loans, they range from a period of 24 months to 84 months. As expected, it took the market by storm in the last two decades; but with more car rental facilities coming into play in today’s world, this industry anticipates a major setback. Unlike property values, car values depreciate over time. Owing to this rapid depreciation, short loan terms and large down payments are norm.

3. PERSONAL LOANS

These loans are undoubtedly the most versatile strata of loans. This is because they can be used for an array of purposes, unlike car loans and student loans. Some subdivisions of personal loans are –

Types of Personal Loans

(i) DEBT CONSOLIDATION LOANS

These are loans taken to pay off other loans; especially credit card debts. It implies reduced monthly payments and low interest rates.

(ii) PAYDAY LOANS

The role of these loans are to try and bridge the gap between two consecutive paychecks. These loans are usually discouraged by the state due to their sky-high interest rates.

(iii) BORROWING FROM FRIENDS AND FAMILY

As one can figure, these loans are usually informal and not always the best option. Many a times, borrowers and lenders alike think it a good idea to sign basic, simple promissory notes and agreements.

(iv) BORROWING FROM RETIREMENT AND LIFE INSURANCE

This is an instance of one borrowing a loan from his own self. Those with retirement plans and insurance funds can take a loan from these in times of need. Due to the absence of a second party, the stress of repayment is greatly reduced. However, in some cases, failure to repay in a stipulated time period may lead to heavy tax consequences.

(v) CASH ADVANCES

Cash advances are short short term loans taken against your credit card. Instead of using your credit card for regular purchases, you withdraw the money and use it according to your own convenience.

4. HOME EQUITY LOANS

These loans, popularly known as Home Equity Lines Of Credit (HELOCs) use the consumer’s home as a source of collateral. As a result, rates of interest are much lower. However loans and lines of credit have one basic difference. The former has a fixed interest rate and entail monthly payment whereas the latter, has variable interest rates and a flexible payment schedule. Having equity in your house makes it worth more than you owe it. Equity is often used for renovation purposes, for consolidating debts and even paying off the education loans.

B. SMALL BUSINESS LOANS

Most Loans taken by businesses are for the same reasons as consumers-buying property, covering short term finances, daily expenses and the like. Some financing products in businesses are-

Some Financial Products in Businesses

Business Loans range from a few thousands to many millions and are especially helpful to those who want expansion of inventory, new office spaces or finance other businesses. Money is lent on the basis of minimum credit scores which vary from one bank/lender to another.

C. MORTGAGES

Any loan taken against property or an asset is a mortgage. The loan is repaid over many years, with interest. Failure to repay results in foreclosure of property. These loans are often taken for education purposes where a house or equally valuable asset is mortgaged to the bank or lender. Many a times home loans also turn out to be mortgages as failure to repay the loan implies that the bank/lender can foreclose and claim ownership of the house. Mortgage rates are usually not very high, although they often vary from lender to lender.

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