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The 5 Main Types of Loans in the Market

I would like to clarify one thing before we go ahead and explain what types of loans we can find on the financial market, which is the eternal confusion between the terms credit and loan. In spite of the fact that these two terms are often used interchangeably in colloquial language, they are different types of financial instruments.

In the case of a loan, the client (borrower) receives a quick cash loan that he has requested in the past and the amount of this loan must be repaid, together with the accrued interest, within the time frame previously agreed upon with the financial institution (lender). During the duration of the loan, the loan payment is usually made in regular installments (monthly, quarterly, semi-annually…) over the course of the loan term.

It is important to note that in the case of credit, the client does not have to request the money, the bank makes it available to them automatically. And the client only pays for the money he has available. In most cases, the interest rates on the loan are higher than those on the loan itself.

Classification of types of loans

The types of loans can be classified in a number of different ways. In order to organize them, we can provide them with a wide range of criteria, for example, by destination, by guarantee, by recipient, by lender, by time of granting, by amount granted or by the required requirements, for example. We will focus in this article on two of the most common classifications of loans: types of loans based on their maturity period and types of loans based on their purpose.

The types of loans based on the maturity period:

  • Loans for a short period of time. There is a maximum term of one year for the loans that are granted.
  • Loans that are medium-term in nature. A loan with a maturity between one and three years is considered a medium-term loan.
  • Loans that are long-term in nature. A loan with an amortization period of more than three years is considered to be a long-term loan.

There are different types of loans depending on the destination or purpose of the loan.

Personal loans

These loans are used to finance specific needs at a given time. They are generally small amounts that are used to finance unexpected expenses, trips, repairs, weddings, etc.

Consumer loans

A consumer loan is used to finance the purchase of consumer durables such as cars, furniture, and appliances for personal use.

It is usually the case that both personal loans and consumer loans are smaller loans with a relatively short repayment period.

Student loans

In the United Kingdom and the United States, these types of loans are extremely popular, and they are becoming more and more popular around the world. These are loans that are intended to finance the costs of tuition at universities, postgraduate studies, or master’s degrees. In comparison to personal loans, student loans have a lower interest rate than those on personal loans.

Mortgage loans

Typically, in these loans, an entity leaves money based on a real guarantee, which is a mortgage of real estate (for example, a house, a parking space, a storage room, a local, solar, etc.). These are medium-long term loans (between 15 and 30 years in duration). As a result, we can find different types of mortgage loans depending on the type of interest rate (fixed, variable or mixed), the type of installments we pay or the type of currency that is used to repay the loan (normal or a foreign currency).

Loans for companies

Loans for companies are arguably one of the most popular ways in which firms can obtain financing, either for production, investment in fixed assets, for expansion purposes, or for starting up different projects, as they are one of the most used ways in which firms can obtain financing. This type of credit was mainly granted by commercial banks in the past. Today, we are able to find financing alternatives whether it is crowdlending or crowd funding because, after the financial crisis, these new models are the only way for many small and medium-sized businesses to be able to obtain financing. In terms of business loans, we can find the following types of loans:

  • An example of a short-term loan is one that is designed to be provided to companies that require specific financing for production campaigns, companies that have incoming and outgoing monetary flows that do not correspond and have liquidity problems, or companies that will be making investments that will be amortized within a short period of time, for example.
  • It is clear, however, that loans for medium- and long-term companies are indicated for those companies that have just been established and have a need for external capital. The money is used to make investments in equipment, technical installations, or intangible assets, such as buildings.
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