Types of Loans

There are many many different types of loans, and different institutions create different kinds of loans to meet consumer needs. But in essence, there are only two major categories of loans: Secured loanss and unsecured loans.

Secured Loans

A secured loan is a loan which is backed by assets belonging to the borrower. This backing is there to decrease the risk assumed by the lender. If the borrower fails to make the necessary payments, ownership of the assets may be surrendered to the lender. The assets that are used to back the loan are known as "collateral".

A common type of a secured loan is a mortgage loan, which is a very common type of debt instrument, used by many individuals to purchase housing. In a mortgage loan, the money borrowed is used to purchase the property. The financial institution is given security which comprises a lien on the title to the house until the mortgage is paid off in full. If the borrower does not pay the loan, the bank has the legal right to repossess the house and sell it, to recover the amount the borrower owes.

You can extend this definition to a car loan, where the car itself is collateral, and the lender can repossess the car if payment is not made.

Unsecured Loans

An unsecured loan is a loan that is not backed by collateral, and that is based entirely on the character and capacity of the borrower to repay. These kinds of loans are also sometimes referred to as "signature" loans. Financial institutions may offer unsecured loans under different formats or marketing packages. Examples include:

- personal loans
- credit card debt
- bank overdrafts
- credit facilities or lines of credit
- corporate bonds

among other.

Generally, the interest rates applicable to the different types of unsecured loans will vary depending on the lender and the borrower, and they may or may not be regulated by law.

All other forms of loans tend to fall under these two broad categories - secured loans, and unsecured loans.