What are the Different Types of Loans?

Jessica Ellis
Jessica Ellis

Financial loans are a temporary release of money based on the promise or commitment to return the full sum after a given period, often with interest. There are many different types of loans that can be used to finance a wide variety of financial needs or investments. Understanding some of the basic types of loan can help a person seeking financial help narrow down possible options.

Student loans are used to pay for the expenses of attending college.
Student loans are used to pay for the expenses of attending college.

Some loans are used to help purchase a tangible item, such as a car or a house. These loans are usually given by a lending institution or bank, and require the borrower to meet several conditions. Usually, until the borrower repays the entire loan, the lending institution technically owns the property bought with the funds, at least up to the value that remains unpaid. Banks, for instance, may hold the title to a person's house while he or she is in repayment on a mortgage, and may seize the house if payments are stopped. A person in repayment technically owns the percentage of the property that he or she has already paid for; this amount is typically known as equity.

A commercial loan is an amount of money released to a business venture for a variety of purposes. Some businesses get a commercial loan to help expand, to cover operations during an off-season, or to invest in updating premises. This type of loan may also be used to buy property for business operations, and is distinct from a property loan or mortgage for non-commercial use.

Many people who plan on attending college or university become extremely familiar with student loans. A student loan is a sum of money, often lent by the government, that is given to cover tuition, books, and living expenses for a qualifying student. The availability of these lending arrangements may be based on the financial need of the student, as determined by tax and credit data. The maximum amount available to borrow may also depend on the particular financial requirements of the school. If a person does not qualify for a government student loan, he or she may still be able to secure a private loan from a private bank or lending organization.

In some cases, loans are described as “secured” or “unsecured.” These terms refer to whether the loan has a lien against failure to repay. A secured loan requires the borrower to pledge goods or assets as collateral, meaning they can be seized if repayments cease. An unsecured loan, such as a credit card, does not require collateral but may require proof of sufficient income and assets before being issued.

A loan may also be described as “subsidized” or “unsubsidized.” These terms are extremely common in student loans that are issued by the government. A subsidized loan means that interest does not accrue until the repayment period begins; with student loans, this means that no interest is added to the owed total until the student graduates or leaves school permanently. Unsubsidized loans begin accruing interest as soon as they are released.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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