Types of Loans
Financial institutions and banks offer different types of loans. We can enter them into two major categories: term loans and revolving credit.
Term loan is a loan where we regularly pay it until the balance is 0$. There is some cases where the loan has an amount greater then 0$ at the end, we call it a balloon payment. We also call it residual value when we deal with equipment or vehicle leasing.
As for the revolving credit, it is a loan with a limit where we can retire without notice inside the credit limit. When we make a payment on a revolving credit, we could re-borrow it later on.
Depending on the amount borrowed, the financial institution could ask to secure the loan on the borrower’s asset. The most common example for the consumer is the mortgage, where the financial institution is secured on the house. In that case, if a client decides to stop paying his mortgage, the bank could repossess the house. It is the same pattern with vehicles.
When there is no asset to secure a loan, the financial institution has to base their decision on the client’s capacity and goodwill only.
As for companies, financial institutions and banks search to secure themselves on the company’s debtor and the inventory. In that case, if the company stops his payments, the financial institution can take the inventory and the future incomes from clients in order to pay itself back from the default.
