Loan is no longer a strange word or phenomenon…oops! That’s almost an overstatement, right? It is so stable, with no fret for its solid foundation over the years, to have different types of loans.
Yes, it is no other than Loans; it has different types both offline and online loans, ranging from cash loans, business loans, personal loans, and even home loans.
Some have collateral requirements and others don’t…hmm, surprisingly true.
Before we start debating the benefits and downsides of loans, how about we have an understanding of this paroxysm.
The Babylonians started it all, no need for the jury. They even provided seed grain loan that are returned upon harvest.
But a clay tablet known as the Code of Hammurabi, was ever present whenever a mutually consenting lender and borrower stood.
Did you know that the Code of Hammurabi is said to be issued by and named after the 6th king of Babylon, Hammurabi?
Animal loans were even recorded in the past during the Mesopotamia’s time. Interest rates were no news since as long as 1754 BCE.
Some say the Jews; some argue the Italians pioneered a form of lending that is widely emulated by present banks and others.
The reason being that when a loan is given, an interest rate was applied; irrespective of the different types of loans.
The borrower then pays this money; interest included at stipulated intervals but there was a hitch.
Mr A interest rate was different from that of Mr B and so on; there was no regulation on interest rate at this time.
Did you know that if a lender felt he was not making sufficient money, he would smash his bench and look for another job?
Over the years, lending has gotten different reforms that have got us looking up with gratitude. Today, if you want to borrow money online for example, there are terms to take note of.
No more thorough beating or losing of limbs orchestrated by the loan sharks as reminders to defaulters…thanks to those reforms but with it came limit of loan for individuals.
Following the establishment of bank in the century it first poked its head out, banks gave loans in confidentiality or played the ‘alarina’ middle man role for a lender and borrower.
Hello readers, In this article I’ll share with you:
- What is loan?
- What are the key reasons for a loan?
- What are the different types of loans and their features?
- Types of loans and advances.
- What are the types of loans for homes?
What Is Loan?
Mr X: Could you let 12 of your children (money) come work for me since they are currently on holiday?
Mr S: Sure, I would if you can agree to my conditions as it is enough risk for my children (money) to leave my sight and unfair they work without pay (interest).
Mr X: Okay, what are your expectations (interest)?
Mr S: I would get a percentage of their original worth as of today with the return of one child every month (principal + interest).
Mr X: Deal! Here are some of my valuable documents (collateral) to be kept in your care as a sign of something dear, I want back, leaving my sight just as you will release your children to me.
Mr S: Do not forget Mr X, if I do not get my children back in complete numbers, you will not get your dear documents back whole too (conditions).
The above discussion is such between a lender and a borrower; a loan has just been granted and taken.
A loan is an amount of money, although it can be other things, lent by an individual to another individual, to be returned over a certain period of time on set conditions.
What is been traded here is almost temporary both to the lender and the borrower as the ‘what is loaned’ leaves the lender’s hand for a specific period of time to stay with the borrower temporarily.
It could become permanent when the lender loses his / her money or other things permanently to the borrower, and the borrower loses his / her collateral (in cases where there is), permanently to the lender.
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Characteristics of a Loan
So, what makes a loan what it is? A loan is characterized by the following:
- Principal: The exact amount that leaves the lender’s pocket or account to the borrower’s pocket or account.
- Interest rate: This is the percentage that is charged on a loan and is determined by the lender within recommended boundaries.
Also, it is the percentage of the principal that is returned when paying a loan, consider it wages for the services of the money loaned. All different types of loans have interest rates.
- Time: This is the period of time a loan is to be returned or a loan repayment should be made or completed.
They say time is constant; the various loan types all over the world have a time frame for repayment.
- Collateral: It is more of a commitment than a signature by the borrower to the lender and an assurance to the lender.
It is a rope that still ties the borrower to the lender even if he wants to abscond, he remembers while it is something to fall back on for the lender.
“…Collateral are always assets and never liabilities…”
Although there are different types of loans that do not require collateral, heard of micro-finance banks?
- Consent: Loans granted and taken occur between consenting parties.
Key Reasons For Taking a Loan
The desire for something good, the hustle for a better standard of living, the struggle for a brighter tomorrow, the fight against poverty oppression, and the battle for liberty from all sorts is the key reason of taking a loan.
The purpose of the loan could be any of the following:
- Property acquisition.
- Vehicle ownership.
- Bills payment.
- Lease / rent.
- Micro financing / small scale lending.
- Business startup
- and more…
The Different Types of Loans and Their Features
As I have said earlier loans can be taken online loan apps or offline, still major types of loans fall under two basic categories namely:
- Secured Loans
- Unsecured Loans
Now, let’s break it down one after the other.
Whenever a loan is taken, the borrower definitely promises to pay and we all know how persuasive some promises can be especially at the time the money is really needed.
Unfortunately, these loan types differs from those without collateral and mere words would not be half enough.
Secured loans, as the name implies, are the types of loans that require security, which is known as collateral.
Collateral in secured loans are appraised by the lender if worthy in comparison to the loan to be taken.
The features of Secured Loans are:
- Higher amount of loan.
- Lower interest rates.
- Longer repayment plan.
The borrower tenders his ‘promise backup’, an asset, the right of the borrower to that ‘tendered asset’ is partial as he shares ownership right with the lender,
But upon default on the loan, the collateral comes under the full ownership of the lender to be done with at the pleasure of the lender.
Example of Secured Loans is vehicle loan.
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This is a total opposite of secured loans as this type of loan do not require collateral.
One need not fear losing the roof over the head as nothing worth value is tied down, just savings in most cases.
Micro-finances are leading the way on these types of loan. Unsecured loans are less risky for the borrowers than the lenders.
The features of Unsecured Loans include:
- Lower amount of loan.
- Higher interest rates.
- Shorter repayment plan.
Did you know that the smashing of a lender’s bench by himself was called “banca rupta” translating to ‘bankrupt’ that is used today?
Loans are further classified based on their interest rates:
Steady Rate Loans
These loans have a fixed interest rate or a flat interest rate that does not change like the weather or house rent.
These loans are also known as fixed rate loans.
Unsteady Rate Loans
They are also known as variable rate loans or adjustable rate loans. These loans can almost never loosen its shackles.
A loan with an initial low interest rate could very much have a higher interest rate before loan repayment is complete.
These varying interest rates are determined by the prime rate
More Types of Loans and Advances
Adequate knowledge on loan types goes a long way influencing one’s decision on loans to be taken.
While loans are either secured or unsecured loans with steady or unsteady interest rates; there are more types of loans and advances to be familiar with too.
These are the loans that require installment repayments that are evenly spaced over a fixed period of time.
Installment Loans can be either monthly or weekly. For some micro-finances, loans are given to be repaid instrumentally either weekly or monthly for a period of 4-6 months.
These are loans that allow for installment repayments.
Based on demand, right? Yes, loans are demanded for before supplied specifically. Demand loans come with varying interest rates on the same loan just like unsteady rate loans.
The repayment dates also varies and the lender is at liberty to request his money back at an interest rate decided by him, anytime he pleases.
This is one of different types of loans that is for the amazons…lol.
Single Payment Loans
These are loans that are almost confused with a quick loan gotten from a friend to be repaid as soon as possible.
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Single payment loans, SPLs are loans that are void of installment repayments. A loan that is gotten and repaid in full with interest at a stipulated time.
Also known as Salary Advance Loans, these loans offer lower amounts of money accompanied with higher interest rates and processing fees.
You may check out our list of all banks in Nigeria to find out which of these banks provide payday loans.
Personal loans are examples of unsecured loans and are taken when those bills payment are becoming too much to be handled independently in the nearest future.
These loans features utilities loans, gadgets loans with higher rate of interest and are less strenuous for borrowers or consumers of such loans.
Example of an unsecured loan is personal loans and you can grab personal loans online.
Mortgage loans are personal loans that are taken for acquisition of properties. Does the National Housing Fund ring a bell?
The mortgage loans feature the principal, interest, and collateral. Now for the collateral, there is no negotiation and it is none other than the property you are getting the loan for.
I hear what??? Argh! It is unfortunately true but the interest rate on these types of loan is very low, as low as 6%.
Upon consideration, the low interest rate on a large amount of money can seem much.
Mortgage loans are one of those different loans that are exclusive to salary earners as repayment is deducted from the salary and balance is given to the employee.
Concessional loans are loans with lower interest rates than normal lending interest standard and it is mostly government loans.
Types of Loans For Homes
Mortgages loans are advisable for those who wish to be home owners but there are different types of loans for homes.
- Fixed Rate Loan
These are mortgage loans with singular interest rate and repayment plan is on monthly basis.
The life span of the fixed rate mortgage loans can be as long as 15 to 30 years. They are best suited for those who plan to stay in that house for a longer period, close to permanently.
- Adjustable Rate Mortgage
Compared to fixed rate mortgage loans, the interest rate on these loans fluctuates at least once a year after 6 months.
The life span of adjustable rate mortgage loans ranges from 5 – 10 years. A change in the nation’s interest rate affects the interest rate on these loans in same manner.
The ARML are best suited for people that are likely to relocate in the nearest future.
- National Housing Fund
One of the popular mortgage loans in Nigeria, that allows for those with scanty savings become house owners.
All types of mortgage loans require a percentage of the principal as deposit before granted except the NHF.
You should know that not all types of banks in Nigeria offers the various loan types mentioned in this post.
Types of Loans (Summary)
It is said that no man is an Island and one needs help at some point in time, even monetary help that may come in different types of loans.
Are you asking ‘what kind of loan can I get?’ but before you take any loan, consider its purpose and then you will be able to tell which of the different types of loans is best suited for you instead of just picking any blindly.
There is neither duplicating nor photocopying your friend or neighbor with a different loan purpose. If you do, you may find yourself in huge debts.
Remember, loans have been known to help people both ways of either elevating them from poverty above their former wealth level or sinking them further in below ground zero.
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