Types Of Loans

Before going on to explain what types of loans we can find in the financial market, we would like to unravel the eternal confusion between the terms credit and loan. 

These two terms, despite being used interchangeably in colloquial language, are different financial products.

In a loan, the client (borrower) receives an amount of money that he has previously requested. 

The amount of this loan must be repaid, together with the accrued interest, within the period of time previously agreed with the financial institution (lender). 

The loan payment is normally made through regular installments (monthly, quarterly, semi-annual...) throughout that term.

In the case of credit, the client does not have to request this money, the bank makes it available to them. 

The client only pays for the money he has. Normally, the interests are higher than those of the loan.

Classification of types of loans

There is not only one classification of the types of loans. We can organize them according to different criteria, for example, according to the destination, the guarantee, the recipient of the loan, the lender, the time of granting, the amount granted, the guarantee or the requirements, etc. 

In this article we will focus on the two most common classifications: types of loans according to the maturity period and according to the purpose of the money.

Types of loans according to the term of maturity

• Short-term loans. Loans are granted for a maximum term of one year.
• Medium-term loans. Loans in which the maturity ranges between one year and three years.
• Long-term loans. Loans whose amortization period is greater than three years.

Types of loans according to the destination or purpose

Personal loans

These loans are used to finance specific needs at a given time. They are generally small amounts that are used to finance unexpected expenses, trips, repairs, weddings, etc.

Consumer loans

Consumer loans are used to finance consumer durables such as cars, furniture, or appliances.

Both personal loans and consumer loans are usually smaller loans with a relatively short repayment term.

Student loans

These types of loans are very popular in the United Kingdom and the United States, although their use is becoming global. 

These are loans aimed at financing university tuition, postgraduate studies, or master's degrees. The interest rates on student loans are cheaper than those on personal loans.

Mortgage loans

In these loans, an entity leaves money based on a real guarantee, which consists of the mortgage of real estate (housing, parking space, storage room, local, solar, etc). 

These are medium-long term loans (between 15 and 30 years). 

We can find different types of mortgage loans depending on the interest rate (fixed, variable, or mixed), the type of installment we pay, or the type of currency in which the loan is paid (normal or in foreign currency).

Loans for companies

Loans for companies are one of the most used ways by companies to obtain financing, either for production, investment in fixed assets, expansion purposes, or for the start-up of different projects. 

In Spain, until a few years ago it was mainly commercial banks that granted this type of credit. 

Currently, we can find financing alternatives such as crowdlending or crowdfunding, new models that, after the financial crisis, represent the only way to obtain financing for many small and medium-sized companies. Within business loans we can find:

• Short-term loans for companies are aimed, for example, at companies that need specific financing for production campaigns, at companies with incoming and outgoing monetary flows that do not correspond and have liquidity problems, or at companies that are going to make investments that are amortized in a short period of time.
• On the other hand, loans for medium and long-term companies are indicated for companies that have just been created and that need external capital. This money is used for investments in equipment and technical installations or in intangible assets.