Types of Loans
April 3, 2019
The lending industry is growing stronger and stronger. Many institutions and private lenders are capable of offering increasingly better deals to their customers. At the same time, people have access to even more information about the options available to them. However, somewhat paradoxically, it looks like many people today are largely confused by the huge variety of products on the lending market.
It’s true, there’s no shortage of deals all around you at any time, and it can be a bit overwhelming to learn about them all if you need to borrow for the first time. With that in mind, let’s take a look at some of the general ways to classify loans and find out what’s unique about each type.
Loans can be taken out for a short or long term. Some products are designed to be repaid over a period of many years – sometimes 10 or even more. On the other end of the spectrum, we also have loans with extremely short durations, sometimes a month or less. However, these types of loans are typically regulated more tightly in some jurisdictions, as they have proven to be prone to abuse by unscrupulous lenders. Still, using them correctly – where they’re available – can make them a very useful tool for getting out of tight financial situations on short notice.
The duration of your loan will not necessarily be determined by you, however. Or rather, you may not have much of a choice in this regard. If you have a low credit score, or need a very specific type of loan, you may find that the only products available on the market have a very tight range of repayment periods.
By Type of Borrower
Loans can also be categorized according to the type of entity that takes them out. In this regard, we have personal and business loans. The names should be self-explanatory – however, the exact conditions associated with each type of loan are not immediately obvious. For example, there are many situations where a personal loan can prove more useful for the needs of your business compared to what’s available from business lenders.
The opposite is not true however. Taking out a business loan usually comes with some strings attached, the most important one being that you have restrictions regarding what the loan can be spent on. Often, you’ll be required to sign a contract stating that you intend to use the funds in this very specific manner, or otherwise face negative consequences. You should be very certain about your intentions if you’re planning to take out a business loan, on top of ensuring that your company is in an appropriate position to repay the loan in the first place.
Secured vs Unsecured
Some loans require you to put up some collateral before you’re allowed to receive money. In other cases, you can skip that part. This is generally referred to as secured and unsecured loans. In most cases, as you’re probably guessing, secured loans expose you to much better conditions and provide you with better repayment options, interest rates, and general availability of deals around you.
On the other hand, an unsecured loan may either be more difficult to obtain, or may have worse conditions. There are also some special types of unsecured loans, like student loans, but we’ll take a look at those in more detail below. In general though, if you need money for a house or car, you will be out of luck looking for an unsecured loan. Nobody in their right mind would give you that much money without collateral, as you’re probably guessing – unless you have some extremely rare circumstances around you. But the people who fall in those categories rarely need loans in the first place.
Special Circumstance Loans
If you’re a veteran, you should take a look at VA loans. They can provide you with much better conditions compared to the average package on the market, although you need to fit certain criteria as a veteran in order to be eligible. Student loans are also aimed at a special group of people – students, as the name implies – but they have to be used towards your education and also have some special conditions, like the fact that you can’t get rid of them even through bankruptcy in most cases.
There are many more types of loans on the market, and this is barely scratching the surface. But these general categories should help you get started and hopefully at least point you in the right direction in your search for the ideal loan product. Rest assured though, as long as you have a plan of action and are honest with yourself about your resources and repayment capabilities, there’s always something suitable out there. You just need to search long enough to find the right deals.