All You Need to Know about Different Types of Loans

Everybody may face some financial difficulties in life. There are different types of loans to meet any of emergency situations. All of them have different purposes and conditions. Besides, online loans vary by amount, terms, rates, fees, and other factors. To choose the one that suits your emergency you’d better do some research and find out what loan options you have, what are pros and cons of each and make a responsible decision before applying. Our article presents a thorough guide into the world of loans that will definitely help you to find yours.

Contents

Loan definition.

Different types of loans.

Loan repayment.

Installment Loans. Cash time loans.

Personal Loans vs Loans for specific purpose.

Secured and unsecured loans.

Online loans. Banks. Credit unions.

Loan rates.

Personal Loans vs Business Loans.

Loan terms.

The table of loan types.

What is a Loan? Clear definition

A loan is a written or oral agreement for a temporary transfer of a property (usually cash) from its owner (the lender) to a borrower who promises to return it according to the terms of the agreement, usually with interest for its use . 

A credit is

1. An agreement between a buyer and a seller in which the buyer receives the good or service in advance and makes payment later, often over time and usually with interest.
2. The amount in a bank account or some other account ^1.

The difference between these notions is a slight one. They may mean the same in certain context, but can differ in another situation. On the whole, the term “credit” is wider than “loan”. Loan is also a type of credit, while the later can also refer to the deposit made in your bank account. A loan is particularly lending term and means the act of borrowing while credit is more the ability to borrow. For example, if you have $1,000 credit, you can get some of this money when you need it. If you have $1,000 loan, you already own it today.

Loan types vary because each loan has a specific intended use. They can vary by length of time, by how interest rates are calculated, by when payments are due and by a number of other variables.

What are the Different Types of Loans Available 

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Understanding Loan Fundamentals and Classification Criteria

Loans across all categories share fundamental characteristics that enable meaningful classification and comparison. These core attributes include:

• Principal Structure and Terms

Every loan represents a contractual agreement whereby a lender provides a specified sum to a borrower under defined conditions, typically establishing both the loan amount and repayment period at origination.

• Cost Components

Beyond the principal amount, borrowers incur financing costs including interest charges, annual percentage rate (APR), and various administrative fees. These costs represent the lender's compensation for capital provision and risk assumption.

• Repayment Structures

Loan repayment mechanisms vary considerably, ranging from single lump-sum settlements to structured installment plans. Installment schedules may be configured as weekly, biweekly, or monthly payments, with either fixed or variable payment amounts throughout the loan term.

• Default Provisions

Loan agreements incorporate specific penalty provisions that activate upon payment default, protecting lender interests while establishing clear consequences for non-compliance.

• Credit Implications

A bidirectional relationship exists between loans and credit profiles. A borrower's credit history and score significantly influence loan approval and terms, while loan applications and payment performance subsequently impact future creditworthiness.

• Purpose and Use Cases

Loans are typically designated for specific purposes, including vehicle purchases, real estate acquisition, medical expenses, educational costs, or other personal financial needs. This purpose-driven nature often influences loan structure and available options.

Based on these distinguishing factors, loans can be systematically categorized into several primary classifications, each serving distinct borrower needs and market

How You Successfully Repay the Loan 

The two main categories of consumer credit according to the repayment term are open-end (revolving) and closed-end credit². 

Installment Loans. Demand Loans. Time Loans 

According to the repayment methodology, loans can be categorized into three primary types, each with distinct characteristics affecting both lender risk profiles and borrower cash flow management:

• 1. Demand Loans (Call Loans)

Demand loans are obligations that become due and payable whenever the lender requests repayment, typically requiring only minimal advance notice as specified in the loan agreement. This structure provides maximum flexibility to the lender while creating potential liquidity challenges for the borrower.

Key characteristics:

• No fixed maturity date; repayment is triggered at lender's discretion
• Common in commercial banking relationships, particularly lines of credit and bridge financing
• Interest is typically calculated on a daily basis using the actual/360 or actual/365 day count convention
• Often secured by liquid collateral such as marketable securities or accounts receivable
• Frequently used in margin lending and securities-based lending arrangements
• May include "evergreen" provisions that allow automatic renewal absent demand for payment

Risk considerations: Borrowers face refinancing risk and must maintain sufficient liquidity reserves or alternative funding sources. Lenders benefit from enhanced control but may damage client relationships through unexpected demand actions.

• 2. Installment Loans (Amortizing Loans)

Installment loans feature a predetermined repayment schedule with regular periodic payments of consistent or variable amounts throughout the loan term. Each payment typically consists of both principal and interest components, with the proportion shifting over time.

Key characteristics:

• Fully amortizing loans: Equal payments throughout the term completely retire the principal balance by maturity. Calculated using the standard amortization formula where early payments are interest-heavy and later payments are principal-heavy.
• Partially amortizing loans: Regular payments are structured with a balloon payment due at maturity, combining the predictability of installments with a final lump-sum requirement.
• Interest-only periods: Some structures allow initial periods where only interest is paid, followed by principal amortization in later periods.
• Payment frequencies vary: monthly (most common), bi-weekly, quarterly, or other schedules aligned with borrower cash flows.
• Negative amortization variations exist where payments are insufficient to cover accruing interest, causing the principal balance to grow.
• Common applications: Mortgages, auto loans, personal loans, student loans, and equipment financing. The predictable payment structure facilitates budgeting and underwriting based on debt-service-coverage ratios.

Amortization methods:

• Straight-line amortization: Equal principal payments plus declining interest
• Constant payment amortization: Level payments with varying principal/interest mix
• Graduated payment structures: Payments that increase over time, often aligned with expected income growth
• Seasonal payment plans: Irregular schedules matching business cycle cash flows

3. Time Loans (Bullet Loans/Term Loans)

Time loans specify a fixed maturity date when the entire principal amount becomes due in a single lump-sum payment, though interest may be paid periodically or capitalized until maturity.

Key characteristics:

1. Interest treatment variations:
2. Interest-only with bullet maturity: Periodic interest payments throughout the term with principal due at maturity
3. Zero-coupon structure: No periodic payments; interest accrues and compounds until maturity
4. Discount instruments: Issued below par value with face amount paid at maturity
5. Common in corporate finance, bridge loans, and construction lending where refinancing or asset liquidation is anticipated at maturity
6. Often structured with takeout financing provisions or mandatory refinancing clauses
7. May include extension options allowing borrowers to extend maturity under specific conditions

Risk profile: Borrowers face significant refinancing risk and must plan for the balloon payment through savings accumulation, asset sales, or refinancing arrangements. Lenders face repayment risk concentration at a single point rather than gradual de-leveraging.

Typical use cases:

• Real estate development projects (construction loans converting to permanent financing)
• Corporate acquisitions requiring bridge financing
• Business loans secured by anticipated asset sales or capital events
• Short-term working capital facilities
• Bonds and other fixed-income securities in capital markets

Hybrid and Specialized Structures

Modern lending markets have developed numerous hybrid repayment structures combining elements of these three basic types:

• Graduated repayment plans: Payments increase over time on a predetermined schedule
• Income-driven repayment: Payments adjust based on borrower income levels
• Contingent repayment: Payments tied to specific business performance metrics or revenue thresholds
• Accordion features: Allow borrowers to increase loan amounts under preset terms
• Step-up/step-down structures: Interest rates or payment amounts change at specified intervals

The selection of appropriate repayment structure depends on factors including borrower cash flow patterns, asset characteristics, tax considerations, accounting treatment preferences, and relative negotiating positions between lender and borrower.

General purpose loans vs loans for specific purpose 

People need money to meet the incredible number of various needs and luckily there are loans to suit any of them. According to the purpose the credit is taken economists and bankers differentiate the following loan types:

General purpose loans: without any designated purpose, lent for any of everyday personal expenses and needs:

• Personal loans
• Installment loans
• Payday loans
• Credit cards
• Cash advances
• Home equity loans
• Credit line
• Lombard loans

They can be used for any of the following: medical or dental services, car or home repair, debt consolidation, vacations, traveling, anniversaries, weddings, etc.

Specifiс purpose loans: lent only for a certain kind of expenses:

• Student loans:  federal student loans and private student loans - are used to cover the cost of higher education.
• Mortgages - to buy homes.
• Auto-loans - to buy a vehicle.
• Business loans - to start or expand a business.
• Consolidated loans - to pay off outstanding debts.

Get Guaranteed Cash Secured by Collateral or Guarantor 

Loan Classification by Collateralization and Credit Enhancement

The presence, type, and quality of collateral fundamentally determines loan pricing, risk allocation, and legal remedies available to lenders in default scenarios. This classification framework encompasses three primary categories with significant implications for both credit risk assessment and borrower obligations.

Secured Loans: Collateral-Based Lending

Secured loans represent debt obligations backed by specific assets pledged as collateral, granting the lender a perfected security interest that provides priority claim rights in bankruptcy proceedings and enables non-judicial foreclosure remedies in many jurisdictions.

Legal Framework and Security Interest Mechanics

The creation of enforceable security interests requires proper documentation and perfection procedures:

• Security agreements establish the lender's rights to specific collateral under Article 9 of the Uniform Commercial Code (UCC) for personal property or real estate mortgage law for real property
• Perfection mechanisms vary by asset class: UCC-1 financing statements for business assets, certificate of title notation for vehicles, mortgage recording for real estate, and possession for certain pledged assets
• Priority rules determine the order of claims when multiple creditors assert interests in the same collateral, with first-in-time typically establishing priority absent subordination agreements
• Loan-to-value (LTV) ratios measure the relationship between loan amount and collateral value, with lower ratios indicating stronger credit protection

Categories of Secured Lending

Real Estate-Secured Obligations

• First mortgages: Senior liens on residential or commercial property, typically limited to 80-97% LTV depending on property type and borrower creditworthiness
• Second mortgages (junior liens): Subordinated claims on property equity, commonly structured as home equity loans or home equity lines of credit (HELOCs) with combined LTV ratios typically capped at 90-95%
• Commercial mortgages: Secured by income-producing properties, often incorporating debt service coverage ratio (DSCR) requirements of 1.20x-1.35x minimum
• Construction loans: Senior liens on real estate development projects with staged funding tied to construction milestones

Vehicle-Secured Financing

• Prime auto loans: Traditional purchase financing secured by lien notation on certificate of title, typically 90-120% LTV including negative equity rollovers
• Title loans (non-recourse pawn structure): High-cost, short-term loans secured by vehicle title with possession retained by borrower, representing 25-50% of vehicle value with APRs often exceeding 300%
• Floor plan financing: Dealer inventory financing secured by specific vehicle identification numbers (VINs)

Personal Property Collateral

• Pawnbroker loans: Possessory secured transactions where the lender takes physical custody of pledged items (jewelry, electronics, collectibles), typically advancing 30-60% of liquidation value with terms of 30-90 days
• Securities-based lending: Loans collateralized by marketable securities portfolios, generally limited to 50-70% of portfolio value with margin call provisions
• Equipment financing: Term loans secured by business equipment with perfected security interests, often incorporating personal guarantees from business principals

Specialized Secured Structures

• Accounts receivable financing: Working capital loans secured by outstanding customer invoices, advancing 70-90% of eligible receivables
• Inventory financing: Secured by business inventory with borrowing bases adjusted for inventory turnover and obsolescence risk
• Cash-secured loans: Credit facilities backed by deposit accounts or certificates of deposit, eliminating credit risk while establishing payment history

Credit Pricing and Risk Mitigation

Secured lending provides multiple risk mitigation mechanisms that translate into more favorable borrower pricing:

• Loss severity reduction: Collateral recovery reduces expected losses in default scenarios, with recovery rates varying significantly by asset class (residential mortgages: 60-80%, vehicles: 40-60%, unsecured: 10-25%)
• Interest rate advantages: Secured loans typically price 200-500 basis points below comparable unsecured credit due to lower loss given default (LGD)
• Extended terms: Collateral support enables longer amortization periods aligned with asset useful life
• Larger loan amounts: Security interests allow loan sizes exceeding unsecured borrowing capacity

Unsecured Loans: Credit-Based Lending

Unsecured debt obligations rely exclusively on borrower creditworthiness and contractual obligations without specific asset pledges, positioning lenders as general unsecured creditors in bankruptcy with subordinated claims to secured creditors.

Risk Assessment Methodology

Underwriting unsecured credit requires comprehensive evaluation of repayment capacity and willingness:

• Credit scoring models: FICO scores (ranging 300-850) or VantageScore metrics aggregate payment history, credit utilization, account age, credit mix, and recent inquiries into predictive default probability measures
• Income verification: Documentation of stable, sufficient income through pay stubs, tax returns, bank statements, or alternative data sources
• Debt-to-income (DTI) ratios: Measure of total monthly debt obligations relative to gross monthly income, with qualified lending typically requiring DTI below 36-43%
• Cash flow analysis: Assessment of discretionary income available for debt service after fixed obligations
• Employment stability: Consideration of job tenure, industry, and income variability

Unsecured Credit Products

Revolving Credit Facilities

• Credit cards: Renewable lines of credit with minimum payment requirements (typically 1-3% of balance or $25-50 minimum), featuring grace periods on purchases (usually 21-25 days) and penalty pricing for late payments or over-limit situations
• Personal lines of credit: Bank-provided revolving facilities with lower rates than credit cards (8-18% APR), requiring periodic reviews and income verification
• Bank overdraft protection: Negative balance allowances on checking accounts with per-incident fees ($30-35) or interest charges on outstanding balances

Term Loans

• Personal installment loans: Fixed-rate, fixed-term loans ($1,000-$50,000 typical range) with 2-7 year amortization periods and APRs of 6-36% based on credit quality
• Peer-to-peer (P2P) lending: Marketplace lending platforms connecting individual or institutional investors with borrowers, featuring risk-based pricing and credit grades
• Student loans: Educational financing including federal loans (fixed rates, income-driven repayment options, forbearance provisions) and private loans (variable or fixed rates, limited hardship accommodations)

Corporate Debt Securities

• Investment-grade bonds: Unsecured corporate debt rated BBB-/Baa3 or higher, offering lower yields reflecting superior credit quality
• High-yield bonds (junk bonds): Below-investment-grade unsecured debt (rated BB+/Ba1 or lower) compensating for elevated default risk with yields typically 300-800 basis points above comparable Treasuries
• Commercial paper: Short-term (1-270 days) unsecured corporate promissory notes used for working capital management
• Subordinated debentures: Junior unsecured debt with contractually subordinated claims to senior unsecured creditors

Risk-Based Pricing Dynamics

Absent collateral protection, unsecured lenders price credit to reflect higher expected losses:

• Default probability premiums: Interest rates incorporate actuarial default expectations for each credit tier
• Loss severity assumptions: Recovery rates on unsecured debt average 10-25% compared to 50-70% for secured obligations
• Risk-adjusted returns: Lenders target portfolio returns that compensate for credit losses, operational costs, and capital requirements
• Credit limit management: Initial and ongoing exposure management based on payment performance and credit bureau data

Guarantor Loans: Third-Party Credit Enhancement

Guarantor-supported lending structures incorporate legally enforceable third-party payment obligations to mitigate borrower default risk, enabling credit access for applicants with insufficient independent creditworthiness.

Legal Structure and Enforceability

• Guarantee agreements: Separate contracts establishing guarantor liability, specifying whether the guarantee is joint (equal co-borrower responsibility), several (proportionate liability), or joint and several (full individual liability)
• Continuing guarantees: Remain effective for future obligations until formally revoked, common in commercial contexts
• Limited guarantees: Cap guarantor exposure to specified amounts or particular obligations
• Performance guarantees: Require guarantor fulfillment of contract terms rather than monetary payment
• Payment guarantees: Obligate guarantor to make monetary payments upon borrower default

Guarantor Qualification Standards

Lenders evaluate guarantors using criteria often more stringent than primary borrower requirements:

• Credit quality thresholds: Minimum credit scores typically 650-700+, demonstrating proven repayment capacity
• Income verification: Documented income sufficient to service both guarantor's existing obligations and potential guarantee liability
• Asset documentation: Evidence of reserves or assets available to satisfy guarantee obligations
• Relationship requirements: Many lenders restrict guarantors to family members, domestic partners, or established business relationships
• Age restrictions: Guarantors typically must be under 70-75 at loan maturity to ensure reasonable repayment prospects

Market Positioning and Pricing

Guarantor loans occupy a distinct market segment addressing credit-access challenges:

• Target borrowers: Young adults with limited credit history, individuals rebuilding credit after adverse events, or those with thin credit files lacking traditional scoring data
• Interest rate range: Typically 30-50% APR in UK markets, 15-35% in US markets, reflecting residual risk despite guarantee support
• Loan amounts: Generally £1,000-£15,000 (UK) or $2,000-$40,000 (US) with 1-7 year terms
• Credit building opportunity: Successful repayment establishes positive payment history for borrowers while guarantor credit remains unaffected absent default
• Regulatory considerations: Consumer Financial Protection Bureau oversight in US, Financial Conduct Authority regulation in UK, requiring clear disclosure of guarantor obligations and consequences

Risk Allocation and Default Dynamics

The guarantor structure distributes default risk across multiple parties:

• Primary borrower responsibility: Initial collection efforts target the principal obligor
• Guarantor activation triggers: Default periods of 30-90 days typically initiate guarantor contact and collection
• Joint liability consequences: Both borrower and guarantor credit reports reflect defaults, affecting both parties' future credit access
• Legal enforcement: Guarantors face identical collection remedies as primary borrowers, including judgment liens, wage garnishment, and bank account levies
• Relationship strain: Default situations frequently damage personal relationships between borrowers and guarantors, requiring careful consideration before entering guarantee arrangements

Comparative Risk and Pricing Analysis

Understanding these structural differences enables borrowers to select optimal financing vehicles balancing cost, risk, accessibility, and their specific financial circumstances and objectives.

Lending Channel Distribution Models Online Loans. Banks. Credit unions, Etc 

The financial services landscape has evolved into a multi-channel ecosystem where borrowers access credit through diverse delivery mechanisms, each characterized by distinct operational models, regulatory frameworks, and customer value propositions. Understanding the institutional and technological differences across lending channels enables optimal borrower decision-making based on individual credit profiles, urgency requirements, and total cost of credit.

Traditional Depository Institutions

National and Regional Banks operate as large-scale depository institutions leveraging extensive branch networks alongside digital platforms. These institutions fund loans primarily through customer deposits, resulting in cost of funds typically between 0.5-3%, which translates into competitive pricing for qualified borrowers. Major players like JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bank maintain thousands of branches while investing heavily in digital infrastructure to provide omnichannel banking experiences.

The regulatory framework governing banks is comprehensive, with oversight from the Office of the Comptroller of the Currency, Federal Reserve, FDIC, and state regulators enforcing capital adequacy, liquidity requirements, and consumer protection statutes. This regulatory burden creates operational costs but provides institutional stability and consumer protection through FDIC insurance covering $250,000 per depositor per institution.

Banks typically employ conservative underwriting standards emphasizing prime and near-prime borrowers with FICO scores above 660 and documented income verification. This approach excludes many credit-challenged borrowers but enables competitive personal loan APRs ranging from 6-24% for qualified applicants. Existing customers often receive relationship pricing discounts of 0.25-0.50% for maintaining checking accounts or direct deposit relationships. However, the approval process typically requires 3-10 business days due to manual underwriting review and extensive documentation requirements including pay stubs, tax returns, and bank statements.

The comprehensive product breadth offered by banks represents a significant advantage, providing borrowers access to mortgages, auto loans, personal loans, business credit, investment services, and wealth management within a single institution. This integration enables sophisticated financial planning and consolidated relationship management, though the bureaucratic processes and hierarchical approval chains can frustrate borrowers seeking rapid decisions.

Credit Unions operate under fundamentally different structures as member-owned cooperative financial institutions. The not-for-profit orientation means surplus earnings are distributed to members through favorable loan pricing and higher savings rates rather than maximizing shareholder returns. This structural advantage, combined with federal and state tax exemption under 12 U.S.C. § 1768, enables credit unions to offer personal loan APRs typically 2-5 percentage points below comparable bank offerings, averaging 7-18% for qualified members.

The democratic governance structure provides each member one vote regardless of account size, creating genuine alignment between institution and customer interests. Membership traditionally required common bonds based on employer groups, geographic regions, or associational relationships, though many credit unions have expanded accessibility through community charters. The National Credit Union Administration provides regulatory oversight and share insurance equivalent to FDIC protection.

Credit unions demonstrate greater flexibility in underwriting decisions, with willingness to consider holistic member circumstances beyond credit scores through manual review and relationship history evaluation. This approach provides credit access to borrowers who might face rejection at traditional banks. Additionally, credit unions typically charge reduced or eliminated origination fees, account maintenance charges, and penalty fees compared to commercial banks.

The limitations of credit unions center on scale and technology. Smaller institutions may offer less sophisticated digital platforms compared to major banks, though larger credit unions like Navy Federal (13+ million members, $175+ billion assets) match bank technology capabilities. Geographic constraints exist outside core service areas, partially addressed through shared branching networks providing access to 5,000+ locations nationwide. Product breadth at smaller institutions may lack specialized offerings like jumbo mortgages or complex business lending, and personal loan caps typically range from $25,000-$50,000 compared to $100,000+ at major banks.

Digital Lending Platforms

Peer-to-Peer Marketplace Lending platforms fundamentally disrupted traditional banking by connecting individual or institutional investors directly with borrowers, disintermediating conventional infrastructure. Platforms like LendingClub, Prosper, and Upstart earn origination fees (1-6% from borrowers) and servicing fees (1% annually from investors) without assuming balance sheet risk. This business model enables operational efficiency and rapid scaling without capital constraints inherent in traditional banking.

The technology-enabled underwriting process incorporates alternative data beyond traditional credit bureau information, including cash flow analysis, education credentials, employment verification, and behavioral data. Machine learning algorithms process applications within minutes rather than days, with some platforms achieving 91% automated approval rates. Individual loans are funded by multiple investors in small increments ($25-$1,000), distributing default risk across diversified portfolios.

Risk-based pricing assigns letter grades correlating to APRs ranging from 7-36% based on algorithmic default probability assessments. This creates credit access for near-prime borrowers (FICO 640-699) who might struggle with traditional bank approval, with funding timelines of 1-3 days for approved applications. However, origination fees of 1-6% effectively increase borrowing costs by 0.2-1.0 percentage points on an annualized basis, requiring careful total cost analysis.

Online-Only Lenders operate without physical branch infrastructure, leveraging technology efficiency to serve various credit segments. Prime online lenders like Marcus by Goldman Sachs and LightStream target high-credit-quality borrowers with APRs of 6-15%, offering convenience and competitive rates with same-day funding options. Near-prime online lenders such as Avant and Upgrade serve credit-challenged borrowers (FICO 580-700) at 15-30% APRs with $2,000-$35,000 loan amounts. Subprime online lenders like OppFi provide small-dollar installment loans ($500-$4,000) at maximum APRs typically capped at state usury limits or voluntary 36% ceilings.

The technology infrastructure includes real-time API connectivity to credit bureaus, bank accounts, payroll systems, and identity verification services. Digital identity verification employs government ID scanning, facial recognition, and knowledge-based authentication to prevent fraud while maintaining user experience. Bank account aggregation through services like Plaid enables cash flow underwriting and automated verification of income and employment, eliminating traditional documentation requirements.

Alternative Financing Sources

Retirement Account Loans allow self-borrowing against accumulated 401(k) savings under IRC § 72(p), with limits of the lesser of $50,000 or 50% of vested account balance. Interest rates typically equal prime rate plus 1-2 percentage points (currently 9.5-10.5%), with repayment to the borrower's own account via automatic payroll deduction. Maximum terms are five years for general purpose loans or fifteen years for primary residence purchases.

The analysis requires consideration of opportunity costs, as foregone investment returns typically exceed nominal interest rates. During bull markets, the true cost may reach 12-15% annually. Loan repayments are made with after-tax dollars, and distributions in retirement will be taxed again as ordinary income, creating double taxation. Job termination typically requires full repayment within 60-90 days or the loan converts to a taxable distribution with potential 10% early withdrawal penalties for individuals under age 59½. This financing option should be reserved for genuine emergencies when no other reasonable credit options exist.

Home Equity Products leverage accumulated real estate equity but create foreclosure risk. Home equity loans provide closed-end second mortgages with fixed rates (currently 8-11%) and lump-sum disbursement. Home equity lines of credit (HELOCs) offer revolving credit facilities with variable rates tied to prime rate (currently 9-12%), featuring draw periods of ten years followed by repayment periods of 10-20 years. Cash-out refinancing replaces existing mortgages with larger loans, extracting equity differences as cash at current refinance rates of 6.5-8%, though closing costs of $2,000-$6,000 and reset amortization schedules require careful evaluation.

Pawnshop Lending represents the oldest form of consumer credit, providing collateralized micro-loans based on pledged personal property. Loan amounts typically equal 25-60% of item's estimated resale value, with average loans of $75-$150. Interest and fees range from 5-25% monthly (60-300% APR) depending on state regulations, with additional storage and insurance fees. Loan terms of 30-90 days are typical, with default resulting in collateral forfeiture without credit reporting or deficiency balance liability. This channel serves unbanked populations lacking traditional credit access, providing immediate liquidity without credit checks or income verification, though at extremely high effective costs reflecting operational expenses, default risk, and regulatory compliance.

Family and Friends Lending constitutes significant informal credit market activity, with Federal Reserve data indicating approximately $89 billion in outstanding informal family loans. Best practices include written promissory notes establishing terms, compliance with IRS Applicable Federal Rates (currently 5-6% for term loans) to avoid imputed income and gift tax consequences, and formal repayment schedules creating documentation trails. Survey research suggests default rates of 30-50% on informal loans, with average amounts of $3,000-$10,000. The relationship risks often exceed financial losses, creating complications during holidays, family gatherings, and estate settlements.

Comprehensive Channel Comparison

Strategic Selection Framework

Optimal borrower channel selection depends on the intersection of credit profile (FICO score, income stability, debt-to-income ratio), urgency timeline (emergency needs versus planned expenses), loan purpose (debt consolidation, major purchase, emergency expense), total cost sensitivity, and relationship value. Borrowers with prime credit (FICO 720+) and flexible timelines should prioritize credit unions and major banks for optimal pricing. Those with near-prime credit (FICO 640-720) requiring rapid funding benefit from P2P platforms and online lenders offering alternative data underwriting. Credit-challenged borrowers (FICO below 640) face limited options concentrated in subprime online lenders, though credit unions may provide manual underwriting opportunities worth exploring.

Emergency situations requiring same-day funding realistically limit options to 401(k) loans, pawnshops, or potentially subprime online lenders, each with significant drawbacks requiring careful consideration. Large loan amounts exceeding $50,000 typically require bank, home equity, or prime online lender channels, as most alternative platforms cap lending at lower thresholds. Sophisticated borrowers conduct multi-channel comparisons evaluating total cost of credit (interest plus all fees), approval probability, funding speed, and ongoing relationship value to optimize financial outcomes.

Get the Loan at the Best Interest Rates 

According to the rates the loans can be:

1. Fixed rates - all the rates and fees are fixed and stated in the agreement.
2. Variable rates - rates can change meanwhile the loan is repaid depending on changing economic conditions.
3. Demand loans are short-term loans that typically do not have fixed dates for repayment. Instead, demand loans carry a floating interest rate which varies according to the prime lending rate or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.
4. A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of college loans in the United States, it refers to a loan on which no interest is accrued while a student remains enrolled in education⁶    
5. A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods or a combination of both. Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an employee benefit (sometimes called a perk) ⁴.

Get Personal Loans for Individuals or Business Loans for Your Company 

Loans are fundamentally categorized by borrower type—individuals or business entities—triggering distinct regulatory frameworks and underwriting approaches.

Personal (Consumer) Loans serve individuals for household or personal purposes, subject to comprehensive consumer protection laws including the Truth in Lending Act, Equal Credit Opportunity Act, and Consumer Financial Protection Bureau oversight. Underwriting focuses on FICO scores (300-850), debt-to-income ratios (typically below 43%), and income verification. Common products include mortgages ($12+ trillion outstanding), auto loans ($1.6+ trillion), credit cards ($1.1+ trillion), home equity lines of credit, personal installment loans, and payday loans. Interest rates range from 6-36% APR for mainstream products.

Commercial (Business) Loans finance business operations under Uniform Commercial Code governance rather than consumer protection statutes. Underwriting analyzes business financial statements, cash flow (debt service coverage ratios of 1.20x-1.35x minimum), industry dynamics, and management capabilities. Products include small business loans, SBA financing, commercial mortgages, and corporate bonds, with amounts ranging from $25,000 to $100+ million.

Loan Types by Repayment Terms 

SHORT-TERM LOANS - less than 1 year.

• A special commitment loan  -  a single-purpose loan to cover unexpected cash shortages. 
• Trade credit - is extended by a vendor who allows the purchaser up to three months to settle a bill.
• A seasonal line of credit of less than one year may be used to finance inventory purchases or production. The successful sale of inventory repays the line of credit. 
• A permanent working capital loan - financing for a business when cash flow from earnings does not coincide with the timing or volume of expenditures.

INTERMEDIATE-TERM LOANS - 1 -5 years, used to buy furniture, fixtures, vehicles, plant and office equipment, autos, boats, and home repairs and remodeling.

LONG-TERM LOANS - 10 - 40 years, for example mortgages ⁵.

Taking into account all of the above mentioned characteristics we’ve made up a table. Here you can see the most popular Lon types and their main features. It may help you get all the necessary information about each type of credit and choose the one that suits your needs.

Various Loan Types 101