Before entering to explain what types of loans we can find the financial market, we would like to unravel the eternal confusion between the terms credit and loan . These two terms, although used interchangeably in the colloquial language, are different financial products.
In a loan, the client (borrower) receives a quantity of money that he has previously requested. The amount of this loan must be returned, together with the interest accrued, in 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 this period.
In the case of credit, the client does not have to request this money, the bank puts it at their disposal. The client only pays for the money he has. Normally, the interest is higher than the loan.
Classification of types of loans
There is not only a classification of the types of loans. We can organize them according to different criteria, for example, depending on the destination, the guarantee, the recipient of the loan, the lender, the concession time, the amount granted, the guarantee or the required requirements, etc. In this article we will focus on the two most common classifications: types of loans according to the term of maturity and according to the purpose of the money.
Types of loans according to the term of maturity
Short-term loans. Loans granted for a maximum period of one year.
Medium term loans. Loans in which the maturity ranges between one year and three years.
Long-term loans Loans whose repayment term is greater than three years.
Types of loans according to destination or purpose
These loans are used to finance specific needs at a given time. They are usually small amounts that are used to finance unexpected expenses, travel, repairs, weddings, etc.
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.
These types of loans are very popular in the United Kingdom and the United States, although their use is becoming globalized. These are loans aimed at financing university enrollments, postgraduate studies or masters. Interest rates on student loans are cheaper than personal loans.
In these loans, an entity leaves money based on a real guarantee, which consists of the mortgage of an immovable property (home, parking space, storage room, premises, site, etc.). It is about 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 fee we pay or the type of currency in which the loan is paid (normal or in foreign currency).
Loans for companies
The loans for companies are one of the most used by companies to obtain financing, either for production, investment in fixed assets, for expansion or for the implementation of different projects. In Spain, until a few years ago it was mainly commercial banks that granted this type of credit. At present, we can find funding alternatives such as crowdlending or crowdfunding , new models that, after the financial crisis, represent for many small and medium companies the only way to obtain financing. Among the business loans we can find:
Loans for short-term companies are directed, for example, to companies that need specific financing for production campaigns, to companies with incoming and outgoing cash flows that do not correspond and present liquidity problems or to companies that are going to make investments that are amortized in a reduced period of time.
On the other hand, loans for medium- and long-term companies are indicated to companies that have just been created and need external capital. This money is used for investments in equipment and technical installations or in intangible assets.