How Many Types of Loans How Many Types of Loans

How Many Types of Loans!

Types of Loans
Loans can be classified further into secured and unsecured, open-end and closed-end, and conventional types.

1. Secured and Unsecured Loans

A secured loan is one that is backed by some form of collateral. For instance, most financial institutions require borrowers to present their title deeds or other documents that show ownership of an asset, until they repay the loans in full. Other assets that can be put up as collateral are stocks, bonds, and personal property. Most people apply for secured loans when they want to borrow large sums of money. Since lenders are not typically willing to lend large amounts of money without collateral, they hold the recipients’ assets as a form of guarantee.

Types of Loans

Some common attributes of secured loans include lower interest rates, strict borrowing limits, and long repayment periods. Examples of secured borrowings are a mortgage, boat loan, and auto loan.

Conversely, an unsecured loan means that the borrower does not have to offer any asset as collateral. With unsecured loans, the lenders are very thorough when assessing the borrower’s financial status. This way, they will be able to estimate the recipient’s capacity for repayment and decide whether to award the loan or not. Unsecured loans include items such as credit card purchases, education loans, and personal loans.

2. Open-End and Closed-End Loans

A loan can also be described as closed-end or open-end. With an open-ended loan, an individual has the freedom to borrow over and over. Credit cards and lines of credits are perfect examples of open-ended loans, although they both have credit restrictions. A credit limit is the highest sum of money that one can borrow at any point.

Types of Loans

Depending on an individual’s financial wants, he may choose to use all or just a portion of his credit limit. Every time this person pays for an item with his credit card, the remaining available credit decreases.

With closed-end loans, individuals are not allowed to borrow again until they have repaid them. As one makes repayments of the closed-end loan, the loan balance decreases. However, if the borrower wants more money, he needs to apply for another loan from scratch. The process entails presenting documents to prove that they are credit-worthy and waiting for approval. Examples of closed-end loans are a mortgage, auto loans, and student loans.

3. Conventional Loans

The term is often used when applying for a mortgage. It refers to a loan that is not insured by government agencies such as the Rural Housing Service (RHS).