Types of Loans

Consumer credit and loans are lending options that allow individuals or businesses to finance their expenses or operations and repay later. Credit and loans come in various forms depending on various factors, as discussed below.

Security Provided

Loans can be classified based on the security provided for the loan offered. This includes secured and unsecured loans. Secured loans are those that require the borrower to provide collateral for the funds offered. If the borrower fails to pay back, the lender can use the pledged collateral to compensate for the pending payment. On the other hand, unsecured loans do not require any form of collateral. However, the lender must first analyze their past relationship with the borrower before offering a loan. The interest rates for such loans are usually higher than those of secured loans due to the inability to recover the loans if the borrower defaults.

Purpose of Loan

Loans can also be classified based on the purpose of the loan, such as education, personal, car, and home loans. Education loans are financing tools that help the borrower pursue education, while car and home loans aid the borrower in purchasing or repairing a vehicle or house. Personal loans are loans taken to finance any personal expense or venture, such as a vacation or a small business.

Pledged Asset Loan

This type of loan is based on a high-value item that the borrower pledges to get the loan. The money can be offered for any purpose but must be provided after an item, such as gold or jewellery, has been provided as collateral. This type of loan can also be offered when an asset such as insurance policies, bonds, shares, or physical assets are provided as collateral.

The amount of money offered for any type of loan depends on the value of the item provided as collateral or the borrower’s creditworthiness. The repayment depends on the terms or the type of loan, usually monthly installments.