What Are Different Types of Loans


A loan is an amount of money that you borrow from someone with an intention of paying it back at once or over time with an agreed amount of interest. Loans are of different types like promissory loans (between friends, colleagues, and family members), payday loans, home equity loans, mortgage, student loans, car loans etc. You should decide to take the type of loan that better fulfill your financial needs. Loans can be broadly categorized into following two types with further sub-divisions:

1.Open-Ended and Closed-Ended Loans:

1.1. Open-Ended Loans: These are the loans you can borrow again and again. Every time you buy something, your credit limit deceases accordingly. Common example is credit cards and home equity loans.
1.1.1. Credit cards: Credit cards are the most common example of open-ended loans you are familiar with. By timely payments or timely reimburse, you can use same credit card repeatedly for purchases.
1.1.2. Home equity loan: It is also one of the examples of open-ended loans. Borrower has to use his equity of home as collateral. The amount of loan relies on value of the property.

1.2. Closed-Ended Loans: Alternatively called "investment loans", closed-ended loans cannot be borrowed after one time. With every payment, the loan decreases. If you need more money, you have to apply for new loan. Consumers must have to pay regularly with interest charges and other agreed conditions until the principal amount is paid off. Common types of investment loans are:
1.2.1. Payday Loans: Payday loans are short termed and high interest rate loans that are borrowed in which you use your next paycheck as collateral. It is gap from one paycheck to another.
1.2.2. Mortgage Loans: Mortgages loans are granted by banks to consumers who can't make upfront payment. The security is commonly real estate. These loans can be paid over long period of time.
1.2.3. Student Loans: Students can take help from student loans to finance their educational expenses. As these are for students, interest rates are very reasonable.
1.2.4. Auto Loans: You can buy brand new car by taking auto loans from car dealer or bank but if you miss payments, you may lose your car.

2. Secured and Un-secured Loans:

2.1. Secured Loan: To get secured loan, an individual has to leverage an asset/personal property. If he is unable to pay back the loan, the lender becomes owner of the property.
2.2. Unsecured Loan: Unsecured loans do not rely on an asset as guarantee/collateral. The lender trusts your credit history and income and grant you loan. It is also known as "personal loan". It is a good option if you have strong credit history and a good payback plan. Personal loan is not taken for any specific reason. The reason may vary from person to person. It could be for home purchase, car purchase, home renovation, marriage expenses or anything. It is usually one-time lump-sum amount for a purpose of purchase. If you default, the lender might take you to the court.


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