What are the types of loans and what are their features?

What is a bank loan? It seems like a very simple question, but it's a concept that you should fully clarify before you apply for a loan from a trusted financial institution. A bank loan is a financial transaction in which a bank lends a certain amount of capital to a borrower, who can be an individual or a legal entity. This transaction is formalised by a binding contract whereby the borrower undertakes to repay the amount borrowed within a certain period of time plus the interest previously set. Both the repayment term and the interest rate must be reflected in this document. There are also a number of terms and conditions associated with the loan agreement that you should know in advance:

1. Principal: The principal is the total amount of money that the borrower is asking the bank for. You may also hear about outstanding principal, a term that refers to the amount of money that is yet to be repaid;
2. Interest: interest can be defined as the price a bank charges for lending money. Thus, the total amount that the borrower has to repay to the bank is the amount of money that the bank has lent to him plus interest, which is fixed in advance according to each bank's interest rate expressed as a percentage. The interest can be fixed or variable, depending on certain points such as the repayment period and the risk that the bank assumes depending on the characteristics of the borrower. Some of the most common interest rates are NIR (nominal interest rate) and APR (annual percentage rate). The latter should get your attention the most as it is the one that determines the total amount you will have to pay to the bank as per the capital requested under the loan;
3. Term: The term is the period of time during which the borrower undertakes to repay the loan in full, including interest. Like other concepts, it should be reflected in the contract. All organisations that interfere with the loan process.

If you go to a bank for a loan, you should know that there are three key figures involved in the transaction:

• Lender: The lender is the person or entity that has the money to be lent; in other words, the bank;
• Debtor: The recipient of the loan is the debtor, as he or she agrees to repay the "debt" contracted with the bank when the loan was obtained. This can be an individual or a company, depending on whether the loan is requested by an individual or a company;
• Guarantor: banks assume a certain risk when they provide capital, so they usually ask for a guarantor from the person requesting the loan. A guarantor is a guarantee that the bank can call upon in case of default on the loan to recover losses. However, if you don't have the necessary assets to present as a guarantor, you must present a guarantor - a person or entity who will be responsible for covering the debt.

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What types of loans are there?

Consumer loans

An amount of money requested to purchase a tangible good or a specific service needed by a customer. They are usually not granted for large amounts, so they are quite flexible in terms of terms and conditions. Student Loans: if you need money to pay for university tuition fees, refresher courses or any other study related expenses, you will need to take out a loan. This type of loan is also known as a youth loan because it is usually applied for by young people who have not completed their studies.

Business loans

In times of economic instability, many companies (especially small and medium-sized ones) decide to take out a loan to cover necessary expenses and investments for which they lack liquidity. In the case of a company, the bank is usually more demanding and requires more precise information. Therefore, it is usually necessary to submit a report justifying both the need for the loan and its viability, thus avoiding default situations in the future.

Loans for the self-employed and mortgage loans

Not all banks offer special loans for self-employed people who do not have their own business, such as freelancers. However, in such cases, the risk to the bank is usually higher. For this reason, they often ask for more documentation and supporting documents in order to safely grant the loan. There are also mortgage loans. As the name suggests, mortgages are designed to finance the purchase of a home, but they can also be taken out to start a business. In this type of loan, the amount is usually higher. For this reason, the repayment or amortisation period is longer and interest rates are usually lower.