A loan is a financial service where your money is advanced to you for the purpose of funding some part of your business. There are several different types of loans that you should know about, each suited for a specific purpose such as financing your wedding, purchasing equipment or finding a home. Each loan will offer different terms and conditions.
That’s why this article gives a brief guide on what types of loans are available, how they work and how you can use them productively to meet your goals.
Loans are subdivided into two categories: secured loans and unsecured loans. Then they are further categorized based on the purpose they serve.
Types of Loan
Secured Loan
Secured loans are mortgages or other forms of credit that require the borrower to provide some kind of collateral as security. If you do not pay back the loan, the lender can sell your collateral and use the money to recover its principal and interest.
The loan amount is based on the value of the security, and interest rates are fixed. These types of loans are thus known as “fixed-rate” or—more colloquially—as “hard money” loans.
One of the main advantages of these types of loans is how easy it is for borrowers to get them. All they need do is provide proof of ownership for the property or item being pledged as collateral—a process that usually takes no more than a few minutes.
The amount of the loan will be lower than what you would pay for a mortgage—which makes this sort of home purchase an excellent way to get started without incurring too much cost.
Unsecured Loans
Unsecured loans are the most common types of loan in Nigeria. They’re called “unsecured” because borrowers don’t have to provide collateral (such as a house or car) to obtain them.
This type of loan is given with no collateral, meaning that you do not have to put your property or any other assets up as security.
You must demonstrate that you can repay the loan without difficulty to get an unsecured personal loan from a bank or other financial institution.
The interest rate on these loans ranges from 8% to 24% per annum, depending on the lender.
These loans give you quick access to money when you need it most. They’re especially useful if you need cash for a big purchase—like buying a car or paying off bills—or in an emergency (e.g., your roof needs fixing).
Types of Secured Loans
Home Loans
A home loan is a type of debt that individuals use to purchase real estate, such as an apartment complex or house. The person who borrows money with a home loan pays interest on the amount borrowed and makes monthly payments towards paying off their debt over time.
Home loans are offered for up to 90% of the property value. The rest of the amount is referred to as a down payment, or equity stake in the home. These loans come with longer tenures and interest rates—which start at 8.3%.
Loans Against Property
A home mortgage is a type of loan that uses your house as collateral. This means that if you default on the loan, the bank can take possession of and sell your house to cover what you owe them.
In order to borrow money from a lender, you must demonstrate an ability and willingness to repay it. A home equity line of credit is the perfect vehicle for doing this because your house serves as collateral in case something happens that prevents repayment by any other means (e.g., job loss). The amount of money available is determined by how much equity you have built up in your home
When you take out a home equity loan, your house is used as collateral. This gives lenders confidence that they will get their money back if necessary (because they can sell your house). But because of this security measure, the interest rates on home equity loans are higher than other types—but still lower than those for unsecured loans like credit cards. The tax benefits associated with these loans also make them attractive options to many people
Loans Against Insurance Policies
If you find yourself facing a cash crunch, consider whether any of your insurance policies could be used as collateral for a loan. You never know—this might just help ease the way towards your financial goals.
Gold Loans
A gold loan is a type of secured loan that can be obtained by using your own gold as collateral. These loans are generally used for short-term needs, such as a car repair or medical bills. They come with shorter repayment tenures than other secured loans like home and property equity lines of credit.
Loans Against Mutual Funds and Shares
You can use your mutual funds and shares as collateral for loans. This allows you to borrow money by taking advantage of your investments, gaining access to funds, and pursuing some of your goals in life.
You will gain access to many repayment choices and have no prepayment charges by choosing a loan against these securities.
Loans Against Fixed Deposits
Some banks allow you to secure a loan against your fixed deposit, and in most cases, the value will remain close to (or even above) that of your deposit account. The bank understands that fixed deposits are safe investments; therefore getting a loan on them won’t be an issue.
Types of Unsecured Loans
Personal Loans
Personal loans are short-term debt obligations that you can use to cover expenses not covered by other types of loans. These might include debts such as medical bills or credit card payments—and the money could be used for almost anything, really!
A personal loan may have low monthly payments, but it will also charge high-interest rates. The interest rates are set by the lender based on factors like how much money is being borrowed, for how long and other variables. Having a good credit score can make it easier for you to get a personal loan.
>> MORE: How to check your credit score in Nigeria
Short-term Business Loans
Short-term business loans are intended to be repaid within one year. They have flexible interest rates and can be renegotiated if the borrower’s financial situation changes during the course of negotiations. Short-term business loans are often used to pay for working capital, such as inventory purchases or equipment purchases. Unsecured and without collateral protection, these loans tend to have high interest rates compared with other types of financing options because they pose more risk than secured lines of credit or equity investments
Flexi Loans
A flexi loan is an unsecured loan that allows you to get funds from your approved limit whenever you want them. You are not limited to making only a certain number of withdrawals, which means that you can access your entire line of credit at no extra cost and without incurring interest charges.
Education Loans
An education loan is a short-term, unsecured loan that can be used to finance the cost of higher education. You can take out an education loan for any educational purpose—from undergraduate degree programs all the way up through professional certification and licensing courses.
Because of their convenience and flexibility, loans have become a popular way to pay for post-secondary school tuition, living expenses or other incidentals. Interest rates on these types of loans can range from 9%–14%, depending on your credit score
Vehicle Loans
Making ensuring you have adequate money to buy a new or used car is the fundamental tenet of auto finance. The amount a person may borrow depends on a number of factors, including their income, credit score, and the interest rate the lender has set.
Due to the fact that these loans are unsecured, which means the bank has no collateral to guarantee repayment, they contain some of the highest interest rates and fees.
Credit Card Loans
One of the easiest methods to pay for your purchases is with a credit card. Even while traveling overseas, they are welcomed nearly everywhere. One of the standout perks is a fantastic rewards program that enables you to accumulate points and miles on your purchases and use them for gifts or savings on subsequent travel. You are essentially borrowing money from your bank when you use a credit card. Obviously, there are disadvantages to this kind of financing. At the conclusion of each billing cycle, you must repay the entire amount of your purchases; otherwise, you risk facing severe financial difficulties.
You must be aware that using a credit card to borrow money carries high interest rates. The interest on your credit card balances will accrue if you do not pay them off in a timely manner, greatly straining your finances.
Consumer Durable Loans
Consumer durable loans, as the name implies, may assist you in buying products like domestic appliances and electrical devices. Depending on the lender, you may be able to borrow between N 5,000 and N 500,000 naira with no security deposit often required. Some loans provide immediate acceptance, 0% interest, little to no paperwork, and no down payment.
People can utilize loans as a valuable resource to achieve a range of objectives. A loan may be a very helpful tool whether you want to finance a new automobile, establish a small business, or purchase a house. When you need money that you have not budgeted for, knowing the many sorts of loans you may receive in India will be helpful. Make sure you have the knowledge you need and be ready.
