What is a Loan?

A loan is an amount of money, most often referred to as principal, generally provided at a cost, in the form of interest as a incentive for a lender to engage in the loan itself.

There are many different kinds of loans all of which have their own qualifications and requirements.

A Secured Loan is a loan in which the borrower signs over or pledges some asset as collateral. In mortgage circumstances this normally takes the form of a lien on the property for which the loan has been taken out for. The lien is removed once the loan is paid in full but serves as a way for the lender to guard against risk and to recover any money that is missing.

A Unsecured LoanĀ is a loan not guarded from risk using collateral or any of the borrower’s assets. Normally available from financial institutions they include:

  • credit card debt
  • personal loans
  • bank overdrafts
  • lines of credit
  • corporate bonds

Interest rates for unsecured loans are naturally higher than secured loans because of the higher amount of risk for the lender and the fewer amount of options for recourse if the loan is defaulted on.

Demand Loans are extremely short term loans with no listed direct or fixed repayment dates. These loans may also carry a floating interest rate which varies in accordance with the prime lending rate. It should be noted that a demand loan can be secured or unsecured and can be called on to collect at any time.

Subsidized loans are loans on which the interest is reduced, either by a hidden or explicit subsidy. This subsidy can delay the interest accruement rate and timeframe, and once again can apply to both secured and unsecured loans.

Concessional loans are loans which are granted on terms generally more relaxed and generous than a standard market loan. Most are offered to employees of lending institutions as a benefit.

With these diverse groups of loan types it is important to realize that as the loan changes so too does the market in which it becomes available. There are two to focus on; personal, and commercial.

Personal Markets are sub grouped into individuals and businesses. Most personal loans are for such things as mortgages, car loans, credit cards, installment loans,and payday loans; just to name a few.

Commercial Markets are made to businesses similar to the personal market but can include commercial mortgages and corporate bonds, and can usually be judged not off of credit scores but rather the credit rating.