In finance, the term loan means that you’re borrowing money from a creditor, which you pay back with interest. They come in different forms for different reasons.
A loan is a type of debt, where the borrower repays the lender the amount that was borrowed plus interest, which would be agreed upon before borrowing the money.
Before getting a loan, the borrower and lender will have an agreement document as evidence for the debt. The document will show the principal amount that’s being borrowed, the interest rate, fees, the date of the agreement, and the terms of the loan.
Types of loans
There are several types of loans, which include consumer, commercial, secured, and unsecured. The type of loan depends on the purpose and lender. The following are the differences between the different types and how they work:
Consumer vs. commercial
Consumer loans are used by people to purchase cars, homes, or other personal uses, whereas a commercial loan is meant for businesses to grow their business. A commercial loan can include a business vehicle or equipment loan.
Secured vs. unsecured
A secured loan means that the money you borrow is secured by something. For example, auto loans are secured loans because if you don’t repay the loan as you agreed with the lender, they can take possession of your car.
An unsecured loan means that nothing is securing it. It’s riskier for the lender, which is why the interest rates are typically higher than secured loans. A personal loan is an example of an unsecured loan because it isn’t tied to an object.
Term vs. revolving
A term loan means that you have a set number of payments to pay the loan off. A revolving loan means that you can draw money and when you repay the amount, it becomes available again. An example of a term loan is a personal loan, and an example of a revolving loan is a line of credit.
Fixed vs. variable rates
Fixed means that the rate won’t change, and you’ll only pay for what you agreed on. Variable means that the rate can fluctuate, which can be caused by changes in the Federal funds rate.
Frequently asked questions
How fast can I get a loan?
It depends on the loan and the lender. It’s possible to get a loan on the same day. For example, if you apply for a personal loan at your financial institution and are approved immediately. They might be able to issue a check or deposit the funds into your account after it’s funded, which can take a total of 30 minutes or more.
Can I get a personal loan if I have bad credit?
It’s possible. However, the credit score is one of the requirements among many lenders. If you are approved for a loan, there’s a possibility that you’ll have to pay a higher interest rate due to your credit score.
Is a credit card a loan?
Yes, a credit card is a revolving loan. What you spend on your credit card needs to be paid back.
Understanding the different types of loans and how they work will help you make good decisions when you need to borrow money. Before you sign a loan agreement, be sure you know all of the details.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.