What are Loans?

On the surface, this is a basic question with a basic answer. Loans are financial vehicles lending institutions use to offer funds to individuals and businesses. When you look deeper, you find the sheer number of lending options available is more complex than the basic answer. In order to understand fully what a loan is, you must understand it in all its incarnations.

Real Estate Loans

These loans pertain to real estate and property. The most common of these is the mortgage loan that helps borrowers purchase a home, but other types exist. Once you own your home, you can borrow money against it using a home equity loan or refinance the balance to a lower interest rate or more favorable payment terms. A real estate loan also comes in the form of a lot loan when you wish to purchase a piece of land to build your home on at a later time.

Business Loans

Depending on your financial institution, business loans have two distinct definitions. The first states that a business loan is any loan made to a business entity as opposed to an individual borrower. A business loan can also include an individual who takes out a loan for business purposes. Typically, this occurs if a sole-proprietor needs money for business operations.

Regardless of definition, business borrowers have numerous options available. Whether your business is a one-man operation or home to 1,000 employees, you can find equipment finance, credit cards and a multitude of other loans tailored for your business. This includes auto and building loans for companies.

Personal Loans

A personal loan is a catch all phrase for any loan not for business purposes. By far, people know more about personal loans than other kind because they have the most experience with it. Credit cards and auto loans are perhaps the best-known options in this category, but they are not alone.

If an individual borrower takes advantage of real estate loans, these fall within the realm of the personal loan, just as a student loan does. When you cannot pay for extensive dental work and the dentist offers you a medical credit line, this, too, is a personal loan. Even getting a cash advance on your paycheck is a personal credit option, albeit a high interest one.

Knowing the defining features of the three basic kinds of loans should give you a solid foundation on which to build your understanding of the lending industry.