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Loans: Types and Features

by: sahil | last updated: April 14, 2010
Category: Personal Finance | Tags: Loans, types of loans, debt, borrower, lender, student loans, federal loans, mortgage loans

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Loans: Types and Features

A loan is a type of debt that has two parties to the contract; the lender and the borrower and just like any debt instrument consists of the redistribution of assets over a period of time. There are countless types of loans available at the disposal of a potential borrower if the borrower meets certain criteria. Broadly speaking loans can be differentiated into two types: secured loans and unsecured loans.

Secured loans are those that have collateral and thus the name secured; since they are secured by the asset in case of non-payment or default. These loans are less risky for the lender and usually have lower interest rates. A typical example of a secured loan can be a mortgage loan or even a title loan. The former is collateralized by the property and the latter by the title to the borrower’s vehicle or car.

Unsecured loans are those that are not backed by any collateral and carry more risk for the borrower. Typically unsecured loans are marketed to people in the low-income class and those with no or poor credit rating (except for credit cards). Usually these loans do not require a credit check and thus carry a lofty interest rate and fees. A typical example of an unsecured loan is a payday loan which is short-term in nature and may carry interest rates of up to a 1000%. Such loans are usually deemed predatory in nature and can burden the borrower with much more debt than is justified.

Student loans are those that are provided by private as well as government entities and some examples of student loans are federal loans which are further categorized into various types. Student loans are meant to help students and their families for paying for education and related expenses. These are also secured but are guaranteed by the government and are easily collectible in case of default by using tax refund cuts and wage garnishing. Some examples of student loans are Stafford loans, Perkins loans, PLUS loans and private student loans.

The most commonly used short-term unsecured loan is credit card loans which have virtually become ubiquitous even in developing countries. However the problems arising out of credit card debt and the recession have worsened the problems of borrowers as well as the lenders in this market. Credit card default and debt is the worst type since it has a negative impact on the credit score and history of the borrower and the bank also stands to lose in cases of non-payment.