Types of Loans

Loans are financial agreements between two parties that involve the redistribution of both fixed and liquid assets. A person secures a loan by borrowing a specific amount of money, called a principal, from a business, institution or another private individual. An interest rate is usually levied against the debtor during the payment procedure. There are two general types of loans but these two categories are further divided into a multitude of varieties.

Secured

Secured loans are simply loans that have been guaranteed against a fixed asset. This is a method to encourage the approval of larger principals. A borrower who defaults on his loan will have to give up possession of his pledged property in recompense.

Two common types of secured loans are subsidized and unsubsidized debts. They are differentiated from each other based on when interest for the principal is applied. A subsidized debt incurs no interest against the debtor until he or she starts the payment schedule. This makes transactions with deferred payment schemes, like student loans, cheaper to pay back for the borrower. An unsubsidized loan on the other hand starts accruing interest the moment the cash is disbursed.

A mortgage is another common secured type of loan. It’s used for large purchases like cars or homes. Your monthly payments are used to pay for the cost of your property and failure to pay regularly and promptly will lead to the repossession of these assets.

Unsecured

Unsecured loans are the opposite of secured loans. They are not guaranteed against the borrower’s fixed asset. These are commonly offered by firms and banking institutions. Bank overdrafts, cash advance loan or the use of credit cards are all considered unsecured transactions.

Credit card debt from an excessive cash advance loan or charged purchase are two very common forms of unsecured transactions. The credit limit that the bank provides cardholders with is merely a debt cut-off point that’s individually determined through analysis of the client’s financial situation.

A payday or cash advance loan from an independent lending firm is also categorized as unsecured. These companies profit by debiting an additional interest charge from the borrower’s account on his or her payday, in addition to the principal amount itself.