In financial terms a loan is simply the lending of currency by one or more people, institutions, corporations or other entities to others, companies etc. The recipient is then usually legally responsible to repay the principle amount borrowed and also to repay interest on that particular debt before it is finally paid off. However, there are different types of loans available depending upon their use and characteristics. Some loans are secured by collateral which can be securities such as bonds, shares, stock certificates or even money deposits.
A secured loan is one in which the lender requires a form of collateral to secure the loan. This may be a house, car, piece of property, or even a credit card or bank account. The collateral will normally need to be at some value that the loan-seeker has some assurance of repayment. If the loan-seeker defaults on the loan the lender has the legal right to take possession of whatever is needed to make payment including the collateral. This is why a car loan or credit card loan would typically be secured by the vehicle itself.
Unsecured loans on the other hand do not require collateral to back up the loan. They can however carry much higher interest rates since they tend to be a bit riskier because there is no assurance of repayment. For example a person can easily get a secured loan to buy gold or collectibles which is much more riskier than taking out a personal loan to afford the gold or collectible. Unsecured loans are usually for things like educational expenses or debt consolidation since they are not backed up by any type of collateral. Some of these loans are also called signature loans and are very popular with credit card and loan companies.
Another type of loan which can vary greatly from one lender to another is the installment loan. These loans are given on the basis of either a lump sum, installment or a monthly commitment. In the case of a monthly commitment the loan is for an agreed upon amount of time which can range anywhere from two weeks to three years. In the case of a lump sum the loan will be for a specific amount of money and then the borrower must pay back the lender according to the terms of the agreement. In both cases there is no collateral required as the only thing that is securing the loan is the promise to pay back.
A person can also obtain a signature loan in which the borrower pledges the goods that they have for collateral. When they fail to make payment the lender can sell off the goods to clear the debt. They can then return the money to the borrower through the process known as escrow. The downside to this is that borrowers can lose their collateral if they fail to pay back the loan.
There are also a few types of loans available which can be fixed-rate or variable-rate. A fixed-rate loan is one in which the interest rate stays the same for the entire life of the loan. A variable-rate loan has a risk factor built into its structure. If the interest rates rises sharply then the lender may adjust the amount that has been lent out in order to protect themselves. These types of loans are more risky because there is no guarantee that they will remain at the interest rate for the entire period.