What Are the Three Types of Lending?

Loans come in many forms. Depending on how much you want to borrow or what the funds will be used for, the loan may have a different name or structure. Lending is important because it gives people and businesses access to the money they need to make purchases, invest, and grow—even when they don’t have cash on hand. This article explains three major types of loans, consumer, commercial and mortgage loans, and when each may be beneficial

1. Consumer Lending  

The first type of loan is a consumer loan. These loans are given to individuals. Examples include personal loans, student loans, and auto loans.  If you want to pay for something (other than a house) but do not have the funds available, you will likely need a consumer loan. Personal loans come in many forms with various terms and lengths.

Another type of consumer borrowing is the use of credit cards. Although people often don’t think of them as loans, they are. When you use a credit card, you are temporarily borrowing money from a bank to be repaid later.

There are many advantages to consumer loans. For starters, you gain access to funds that you may not otherwise have. Many consumer loans also offer fixed monthly payments, known as installment loans. Another advantage is their flexibility—you can use personal loan funds for nearly any purpose.

While consumer loans can be helpful, borrowers may also face unexpected fees or penalties if they don’t review and understand the loan terms before applying. And it is usually cheaper to pay for goods upfront rather than borrowing, so if this is an option, it’s recommended.

2. Commercial Lending  

Commercial lending is the second loan type. These loans are given to businesses and are commonly used to reduce start-up costs, acquire another business, manage short-term cash flow gaps, or fund growth.  This article by Nerdwallet goes over these types of commercial loans a little bit more in depth.

The advantages of commercial loans are straightforward: they may be necessary for business. Whether a business is just starting out or scaling in size, borrowing can be vital for success. Making consistent payments can also help a business build credit, making it easier to borrow in the future.

One major drawback is the cost. Some commercial loans may be affordable, while others may come with high interest rates or fees. It’s important to understand all terms and conditions before committing. Another potential downside is the requirement for a personal guarantee—meaning if the business cannot repay the loan, your personal finances could be impacted.

3. Mortgage Lending  

The third and final type of lending is mortgage lending. The CFPB defines a mortgage as “an agreement between you and a lender that gives the lender the right to take your property if you don't repay the money you've borrowed plus interest.” Mortgage terms are typically 15 or 30 years and are given to individuals or families who want to own property. Mortgages can also be given to businesses wanting to buy land or a building. Rocket Mortgage has a great article on mortgage types, as well as common terminology you will hear regarding mortgages. If you are looking to apply for a mortgage loan, you can also access their tools to estimate what you may qualify for.

There are a few clear advantages to having a mortgage. The biggest one is that it makes owning a home or property possible without having to pay everything upfront. In many cases, mortgage rates are lower than other types of loans, especially if you qualify for a government-backed option. The longer loan terms—usually 15 or 30 years—also help keep the monthly payments at a manageable level. And just like with other loans, making payments on time can help build credit.

That said, mortgages do come with some downsides. They are long-term commitments, and by the time the loan is paid off, the total amount paid is likely more than the original price because of interest. Homeownership also comes with extra costs like property taxes, insurance, and maintenance. Missing payments can seriously affect credit scores and even risk losing the home.  Property values can also go up or down, so there’s always some level of financial risk involved.

There are a variety of each type of loan, and each has its own benefits and its own challenges, but all of them exist to help people and businesses. That could mean buying something they need, starting a company, or purchasing a home. Taking the time to look over the terms, comparing options, and ensuring the loan fits your budget can go a long way in helping you make confident, informed financial decisions.

Looking for more info on topics like this, view our full catalog of financial blog articles at www.checkngo.com/finance-academy.