9 Different Types of Loans and Their Uses

A loan may be defined as any money, property or other material goods lent to other parties for repayment in the future inclusive of interests and other financial charges. Loans can either be for a one-time specific amount or as an open-ended line of credit.

These different types of loans are received from financial institutions and banks. Lenders get their revenue from interests and other fees accruing from loans.

Below are the nine different types of loans in the market today:

1. Conventional Loans

Also referred to as conventional mortgage loan, this is an unsecured home buyer’s type of loan that is not offered by government entities. This type of loan is guaranteed by private lenders such as banks, credit unions or mortgage companies. Conventional mortgages currently make up two-thirds of the homeowners’ loans issued in the US.

Examples of conventional loans include those that require collateral, also known as secured loans; and loans that are dependent on the creditworthiness of a borrower. These types of loans are either conforming or non-conforming.

2. Conforming Loans

These types of loans are in compliance with the GSE guidelines. One of the most popular guidelines is on the size of the loan, which, for instance in 2018 was limited to $453100 for single homes in the US.

A loan that does not meet these guidelines, for instance, one that exceeds the maximum amount, is referred to as a jumbo loan, which is a type of a non-conforming loan.

3. Secured Loans

The borrower has to provide collateral to qualify for a secured loan. This could be in the form of property or a car. Payday loans work in a similar fashion, allowing you to borrow against your next paycheque. These types of loans are a secured debt owed to the creditor. In the case of defaulted payments, the creditor is entitled to take back the asset that was presented to the lender as collateral. They may then opt to sell the asset to recover some or all the amount initially borrowed.

If the money from the sale of the asset is not enough for the creditor to recover all their money, the creditor can decide to get a deficiency judgment against the borrower for the remaining balance.

4. Unsecured Loans

In the case of unsecured loans, the lender uses your credit and income history to determine the appropriate interest rate and size of the loan. Unsecured loans are, however, not backed by collateral. The interest rate on secured loans is usually lower than for that for unsecured loans. This is informed by the added security a secured loan provides a lender.

5. Open-ended Loans

A person planning to apply for these types of loans can access it whenever they need it and pay it back on an on-going basis. Open-ended loans do not have an exact term or end date. An example of an open-ended loan is a credit card and a home equity line of credit (HELOC).

In HELOC, the lender is able to determine the amount of credit to offer based on a percentage of the value of your appraised home after deducting the balance owed in a mortgage. Most homeowners use this loan to renovate their homes.

6. Close-ended Loans

Examples of close-ended loans include student loans, mortgages and car loans. These types of loans are offered once and cannot be reapplied. If you want credit after receiving a close-ended loan, you will have to apply for another type of loan. In a close-ended loan, you are required to pay back the borrowed amount in full by a specific date.

The amount paid back is inclusive of all interests and financial charges agreed upon at the signing of the credit agreement. They are one of the more ideal loans for people with bad credit.

7. Concessional Loans

These types of loans have extended grace periods and below market interests rates. They are sometimes referred to as ‘soft loans.’ The terms of concessional loans are substantially more generous than market loans. It is the type of facility that foreign governments extend to developing countries.

8. Demand Loans

Demand loans are typically short-term loans with no specific repayment dates. Demand loans attract floating interest rates, which may vary depending on the prime lending rate or other outlined contract terms. They may be secured or unsecured, and the lender can ‘call’ them for repayment at any time.

9. Subsidized Loans

Subsidized loans are usually extended to needy undergraduate students. Interest on these types of credit is not accrued while a student is in school or during deferment periods. Once a student has exhausted their time limit, they can no longer access subsidized loans, and if they have outstanding loans at the expiry of the time limit, the remaining balance starts accruing interest.

If you are planning to get a loan, whether to do business or for personal use, ensure you have a clear understanding of the agreement. You also need to be sure of the repayment terms and the consequences of defaulting on payments.