Types of loans

Types of loans

1) Secured

• loan in which the borrower pledges some asset (e.g. a car or property) as collateral
• A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property
• The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it
• In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing
• The duration of the loan period is considerably shorter — often corresponding to the useful life of the car
• There are two types of auto loans, direct and indirect
• A direct auto loan is where a bank gives the loan directly to a consumer
• An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer

2) Unsecured

• monetary loans that are not secured against the borrower's assets
• may be available from financial institutions under many different guises or marketing packages
• credit card debt
• personal loans
• bank overdrafts
• credit facilities or lines of credit
• corporate bonds (may be secured or unsecured)

• The interest rates applicable to these different forms may vary depending on the lender and the borrower
• These may or may not be regulated by law
• Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited
• An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders)
• In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets
• Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible