Different types of loans explained

Any person who borrows money is considered to have taken a loan. This transaction is usually of a pre decided amount and in majority of cases attracts interest. In other words, loan dealings come in various forms, with variable conditions, which may range from simple monetary contracts between friends and family or bigger deals like mortgage, student or payday loans. The type of loans differs because their end use is different. Some of the most common type of loans is discussed below.

Student loans

These credits are basically for university or college students, and intended solely for funding their cost of education. Both Government and private institutions offer these facilities, with the former being more borrower-friendly due to low interest rates. In the UK, student loans are administered by the Students Loans Company (SLC) and the money can be paid directly into your student bank account.


Mortgages are low interest loans offered by financial institutions secured against property normally taken out when buying a house. Though the rate is low, there is an inherent risk attached of forgoing your asset, should you fall behind in repaying on time.

Vehicle loans

Similar to mortgages, vehicle loans are linked with the vehicle you intend to purchase. Both banks and auto dealers provide these loans at varying rates of interest. In this case also, should you default on the instalments, there is a possibility of your vehicle being seized by the loan provider.

Personal loans

A personal loan, is normally offered to any individual with a good credit history. These loan types are a popular option as they can be utilised for any purpose. A personal loan is often taken out to clear outstanding credit card dues or for reducing interest by transferring the balance.

Business loans

Business loans are offered to businesses large and small by banks and other financial institutions. Known as “debt”, business loans are the most common way to raise funds for businesses alongside equity.

Payday loans

Though this type of loan is discouraged by some institutions, but they remain popular in the marketplace. Payday loans are designed to help those in need of immediate cash for a short duration (until the next pay day), and come with very high interest rates. They are generally processed within hours, and the funds can be available in the borrower’s account the same day. You can read more about them on CashLady website.

Although credit forms a vital part of any economy, one must consider the impact it may have on your budget. While taking a loan may seem as an easy money option, it is important to go through the terms and conditions carefully. Repayment is the most important part, so one should carefully decide the amount he or she can set aside every month to clear the loan without being in default.

For explanations of other financial terms, please take a look at our glossary.

Photograph by Images of Money

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