Loan contracts come in all kinds of forms and with varied terms, ranging from simple promissory notes between friends and family members to more complex loans like mortgage, auto, payday and student loans.
Banks, credit unions and other people lend money for significant, but necessary items like a car, student loan or home. Other loans, like small business loans and those from the Department of Veterans Affairs, are only available to select groups of people.
Regardless of type, every loan – and its conditions for repayment – is governed by state and federal guidelines to protect consumers from unsavory practices like excessive interest rates. In addition, loan length and default terms should be clearly detailed to avoid confusion or potential legal action.
In case of default, terms of collection of the outstanding debt should clearly specify the costs involved in collecting upon the debt. This also applies to parties of promissory notes as well.
If you are in need of money for an essential item or to help make your life more manageable, it’s a good thing to familiarize yourself with the kinds of credit and loans that might be available to you and the sorts of terms you can expect.
What is a Consumer Loan?
A consumer loan is a loan given to consumers to finance specific types of expenditures. In other words, a consumer loan is any type of loan made to a consumer by a creditor. The loan can be secured (backed by the assets of the borrower) or unsecured (not backed by the assets of the borrower).
Types of Consumer Loans
Mortgages: Used by consumers to finance the purchase of a house
Credit cards: Used by consumers to finance everyday purchases
Auto loans: Used by consumers to finance the purchase of a vehicle
Student loans: Used by consumers to finance education
Personal loans: Used by consumers for personal purposes
For qualified borrowers, consumer loans serve a multitude of purposes and are essential in helping them finance their life.
Secured vs. Unsecured Consumer Loans
Secured consumer loans are loans that are backed by collateral (assets that are used to cover the loan in the event that the borrower defaults). Secured loans generally grant the borrower greater amounts of financing, a longer repayment period, and a lower charged interest rate. As the loan is backed by assets, the risk faced by the lender is reduced. For example, in the event that the borrower defaults, the lender would be able to take possession of collateralized assets and liquidate them to repay the outstanding amount.
Unsecured consumer loans are loans that are not backed by collateral. Unsecured loans generally grant the borrower a limited amount of financing, a shorter repayment period, and a higher charged interest rate. As the loan is not backed by assets, the lender faces increased risk. For example, in the case of borrower default, the lender may not be able to recover the outstanding loan amount.