Although loans are issued not only by banks, they occupy a dominant position in the credit market. Therefore, borrowers are most often faced with different types of loans. We will review them in our article.
Participants of credit relations
Any type of loan requires the participation of at least 2 parties:
- Lenders/Creditors. These are organizations or individuals who have the right to issue loans. Lenders lend money for any purpose, such as buying a phone, a computer, an apartment or a car.
- Borrowers. The lenders’ clients receive the amounts agreed upon in the contract. The borrowers are not the owners of the borrowed money. In this case, funds are provided on a temporary basis. The loan amount and terms depend on company policy.
Classification of loans
Loans can be classified according to numerous criteria. A striking example of this is the interest rate. The latter is divided into 3 types – positive, interest-free and negative.
If we take the real form of a loan as a basis, then experts distinguish 3 types:
- Commodity. The form of credit implies the transfer for a certain period of a certain thing, which is established according to generic characteristics. These types of loans are leasing of special equipment, payment by installments for goods, renting out property, etc.
- Monetary. The most common form today. After the loan is issued, the borrower receives a set amount of funds. After a specified time, he or she undertakes to return the money and pay interest for their temporary use.
- Mixed. This type of loan is used when the loan is provided in a commodity form, but the repayment is made in money. The reverse scheme is possible (money => goods).
Additionally, loans are differentiated by purpose – consumption or production.
Production loans include commercial and export loans. The essence is the same – providing money and / or goods. However, the type of credit for export, as the name implies, is used in foreign trade economic activity.
Personal loans are classified into several types. Non-targeted loans are required to meet immediate needs. This includes credit cards. Target ones are typical for the markets for the sale of cars, travel packages, real estate, etc.
Finally, loans are divided according to internal structures (say, a revolving loan) and the status of lenders / borrowers. Loans to legal entities are also widespread.
Bank loans for individuals
Bank loans for individuals form the main client base of lending companies. Loans in cash are the most popular on the territory of the United States. The following types of loans are in demand among Americans.
Consumer loans are issued to US citizens for the purpose of purchasing a wide range of consumer goods. Loans are taken for the purchase of smartphones, tablets or washing machines, as well as real estate, furnishings or vehicles. There are almost no restrictions.
Banks strive to make lending as easy as possible. Earlier the application process required a mandatory visit to monetary organizations, but now it is easy to submit an application online. As the requirements for borrowers are constantly weakening, the demand for consumer lending is increasing every year.
Mortgage loans for individuals
“Mortgage” is a loan where real estate acts as collateral. When an apartment or a house is bought as part of a loan, real estate becomes a kind of guarantee for the return of loan money.
Sometimes mortgages are issued for the purpose of repair or construction work. The borrower already has a property. The loan is taken under it. And in a situation with the purchase, and repair or construction, the mortgage allows you to quickly resolve the issue of housing without accumulating an impressive amount of money.
As the name implies, a car loan is designed for the purchase of automobile vehicles. The cars are pledged to the credit transaction. The money for the car is either paid in part, or the car is taken without a down payment.
Often, car lending is carried out by bank transfer. The money for the vehicles is transferred by the bank to the seller’s account. Usually, this is a legal entity like a branded car salon, but there are exceptions when money is transferred to individuals.
Payday loans are short-term loans that come with high interest rates. Most often they are limited to 3-4 weeks.
The average amount of payday loans ranges from $100 to $1,000. Basically, this type of loans is used by individuals and small businesses. The demand for payday loans is largely due to the ease of application, relaxed eligibility criteria, immediate approval, and fast funding.
Loans for business development
Such loans are issued for starting or expanding a business. There are many types of loans for entrepreneurs. For example, factoring loans. Lending is carried out for goods or services. The transaction involves a supplier, a buyer, and a bank or factoring company.
Forfaiting loans are no less in demand. The loan transaction also involves 3 parties. Forfaitor, aka a financial agent, buys the obligations of the borrower that he or she has to the lender. Loans are characterized by the speed of processing and a fixed interest rate.
“Credit card” makes it possible to make payments with your own or borrowed funds. Loan limits are set by loan agreements. The more solvent the client is, the greater the amount.
Cards are a good alternative to payday loans and consumer lending. It is important that you do not need to account for the loan money. In addition, repayment during the grace period eliminates interest payments.
The main types of lending for legal entities
Legal entities, even those with a bad credit history, are often able to get loans on more favorable terms than individuals. This is due to the desire of the state to help the development of entrepreneurship. Another thing is that registration for a business is accompanied by a number of bureaucratic procedures. Banks check whether the borrower has arrears, the frequency of income tax payments, etc. Funds are issued subject to a comprehensive audit of business activities.
Mortgage lending for business is not much different from similar loans for individuals. A mortgage is issued for the purchase of commercial real estate instead of housing – offices, industrial workshops, medical offices, warehouses, etc. For the rest of the issues, there is no particular difference.
Leasing is a cross between a loan and a long-term lease with the option to purchase property. Businessmen enter into leasing agreements to purchase expensive goods on favorable terms. These include road transport, production machines, technical structures, etc.
The main difference between leasing and a standard loan is that the property does not immediately become the property of the entrepreneur, but is rented. If the same truck or laser cutter is purchased, the equipment is not credited to the balance sheet. There is no need to pay tax for it. Another advantage of the leasing relationship is the flexibility of payments.
Overdraft is a loan that is intended for servicing payments on the settlement accounts of legal entities. The service opens the possibility of debiting more funds from the PC than credited at the time of the payment transaction. Such loans are an effective tool for situations when you need to urgently pay off counterparties for a particular transaction.
On average, applications for connecting an overdraft are processed up to 1-2 weeks. During the specified period, banks check the credit history of borrowers, analyze business activities and calculate the amount of future loans. Loans to pay off overspending on current accounts are taken for 30-60 days. Interest is paid for the actual provision of the service. Additionally, a commission is charged for opening a limit.
After signing a loan agreement, a legal entity is provided with a certain service or given any product. In both cases, deferred payments apply. The entrepreneur is allowed to benefit from the purchased property, as well as to dispose of it at your own discretion.
Legal entities are actively resorting to other types of commodity loans. Alternatively, consignment loans. The tricky term hides the provision of products for subsequent sale. A new batch of goods is shipped after the previous debt has been paid off.
State loans are given not only to entrepreneurs and individuals who are citizens of the United States. Loans are also issued to foreign countries. Sometimes they are received by international financial organizations.
The state, as a rule, is of a voluntary nature. Deviations are observed only in case of force majeure on a national scale. For example, during wars, many countries issued bonds to raise funds to fund their armies.
Foreign international loans
International types of loans perform many useful functions. First of all, it is economic regulation. Loans help countries avoid default, restructure industry, support the national currency, or pay off debts to strategic partners.
International loans are issued to states, specific companies, banking structures and even individual citizens. The growth in the volume of credit funds from abroad speaks of the disastrous state of the economy or, conversely, its development. Large lenders willingly lend money to countries that are experiencing economic prosperity.
Different types of loan interest
The interest rate is used to determine the overpayment on a loan and is divided into 4 types:
- Fixed – remains unchanged for the period specified in the contract;
- Floating – varies depending on factors affecting its size;
- Rrecursive – involves a one-time payment of interest at the end of the loan term;
- Antisipative – implies the repayment of interest at the stage of registration of a credit transaction.
What does the interest rate depend on?
- The rate of inflation of the national currency;
- Market conditions;
- The degree of the bank’s confidence in the borrower;
- Expenses of the lender for the formation of equity capital;
- Social initiatives of the state.
Classification found in term loans
- Short term (up to 12 months);
- Medium term (up to 3 years);
- Long-term (from 5 years or more).
Short and medium-term loans are usually taken for the purchase of equipment, payment for medical services or urgent needs. Long-term loans are taken for the purchase of housing or cars. Entrepreneurs mainly use them to purchase expensive equipment.
Some banks issue so-called overnight and same-day loans.
Types of collateral
- Secured loans. In the banking sector, such types of loan security as collateral and surety are common. Collateral form means that the borrower is liable to the bank for the property belonging to him/her – vehicles, apartments, residential buildings, land plots, etc. Guarantors are private and legal entities who bear the same responsibility as the borrower for debt repayment;
- Unsecured loans. The borrower takes a loan without collateral and guarantors. The increased risk of losing funds is compensated by the introduction of various restrictions. Banks raise interest rates, limit loan amounts and shorten repayment periods. Large unsecured loans are more difficult to access because lenders incur significant losses in the event of default.
Types of loan agreements
- About refinancing.
Finally, we will give a banal piece of advice that many borrowers for some reason neglect. Regardless of the type of loan, always carefully study the conditions under which the loan is issued. Thanks to this, you will avoid extremely unpleasant consequences in the form of unnecessary overpayments, loss of valuable property or lengthy litigation with the bank.