Types of credits and loans

economic-dictionary

The types of credits are the different categories of financing based on different criteria. Among them, the time of indebtedness, the target audience, the level of support, the end use, among others, stands out.

Credit and loan are not the same, but they have many characteristics in common. However, in order to encompass the most popular forms of financing, we will encompass everything.

Next, we will present the main ways to classify loans:

Types of credits according to duration

Taking into account the types of credits according to duration, the following can be distinguished:

  • Short term: They are those that are destined to cover immediate needs. The borrower has a year or less to pay it back. An example is the credit card debt for the month. This type of financing is usually more expensive (charges a higher interest rate) compared to longer term loans.
  • Medium term: These are financings with a duration of between one and five years. It can be, for example, consumer loans.
  • Long term: These are loans for more than five years. The most representative is the mortgage.

Credits according to the type of support

According to the level of financial support, there are several types of credits:

  • Unsecured: This is the technical name of the loans that are granted without a specific guarantee rather than the word of the debtor. However, what is sometimes requested is the declaration of a third party, which we will call an endorsement. The latter undertakes to comply with the obligation in the event that the person receiving the financing does not do so.
  • Pledge credits: These are those obtained by leaving an asset as collateral, which is usually a jewel or a work of art.
  • Credits with collateral: They are backed by an asset other than the one purchased with the financing.
  • Consumer loans: In some cases they can be guaranteed by the good acquired with the financing.
  • Mortgages: They always have a guarantee that is the same property that they subsidize.

Loan according to its purpose

The credits, according to the final use they will have, can be classified as follows:

  • Personal loans: They finance a specific need at a certain time, for example, a wedding or a trip. They are not of very high amounts.
  • Consumer loans: They allow you to buy durable goods such as appliances or vehicles.
  • Student loans: They are used to pay for college or graduate tuition.
  • Mortgage: It is the financing granted to buy a real estate. This property is, in turn, the guarantee of the same credit. The indebtedness period is between 15 and 30 years.
  • Loans for companies: They are those that companies request to pay their suppliers, invest in fixed assets, expand their business, among others. They can be classified, in turn, according to the size of the client, whether it is for large, medium, small or micro companies.

Other types

It is worth mentioning that credits are also distinguished according to the interest rate they charge, whether it is at a fixed or variable rate. The latter, based on a benchmark indicator such as Libor.

Also, consumer loans can be divided into revolving and non-revolving. The first ones are those that have a balance, of which a part or all can be disposed of, and that is renewed. An example is credit cards.

Meanwhile, non-revolving loans are for a specific amount and for a specific purpose such as vehicle loans.

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