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What are Loans? – Types, Work, Applying, and More

What are Loans?

Loans are one of the first monetary actions that a person performs in his life. While these loans between friends carry a moral obligation, financial institutions’ loans also have a legal obligation.

It can say that a loan is a monetary or financial transaction in which a person or institution gives an amount to a third party.

This third party receives the money and acquires an obligation to pay the loan granted in full. In most cases, these loans must repay in the short term, including the interest generated during that period.

What are the Types of Loans?


There are several types of money loans, and depending on your needs, you can find the right one for you. A loan without collateral is any immediate nature loan where a third person is not needed who can intercede in the payments if necessary.

In the same way, one of the most famous is the immediate money loan. A direct money loan is when a contracting party can arrive and request a fixed amount and obtain it in full in a short time. Finally, there are mortgage loans, consumer loans, and personal loans.

1. Personal Loans

  • Personal loans are those financial products that allow us to finance the acquisition of durable goods (for example, a car), pay for a master’s degree, take a trip, or make a reform.
  • This type of service formalizes a contract that establishes the amount granted and the periodic fees that we will have to pay, including interest, commissions, and expenses per the agreed conditions.
  • In recent years, thanks to Fintech technology’s advancement, fast loans have been positioning themselves as the best product for this type of financing.
  • Among its advantages is speed (in a period of between 24 and 48 hours, you can already access the requested money), flexibility when ordering credit, and security.
  • Also, it is regulated by Law 16/2011 of contracts of consumer credit and acting under the regional authorities’ supervision. Fast credit institutions have online technology that allows them to fight fraud and fraud and identity theft crimes.

2. Business Loans

  • One of the most public states in which companies need to apply for a loan is deciding to make a significant investment in a good or a service to improve productivity or boost business growth.
  • In the current context, due to the economic crisis, companies have not had easy access to loans and credits from traditional financial entities.
  • Fortunately, new figures and legal operations have emerged quickly and easily obtain the necessary liquidity for the day today.
  • However, it must bear in mind that when an entrepreneur faces requesting a loan for companies. It must provide the documentation that justifies this operation’s need and viability to deal with its amortization before the financial institution.
  • In this sense, the new financial entities that operate through the internet in an agile and efficient way allow the necessary online procedures to carry out to receive the economic injection at the precise moment for the investment.

3. Loans for the Self-Employed

The self-employed sector is undoubtedly one of the most difficult to obtain financing. In the case of traditional financial institutions, in addition to the usual documentation, the following documentation is usually requested:

  • Business plan.
  • Proforma invoices or budget of the investment to make.
  • Tax arrival for the last three years, with annual summaries of VAT and personal income tax or companies.
  • Quarterly statement to the Treasury for the current year and accounting status at the time of application.
  • Details of the financing operations that the applicant has with other financial entities.
  • Last payment to Social Security.
  • Proof of stable income.
  • Photocopy of the self-employment registration document.
  • Seniority in the company and type of contract.
  • Also, when applying for one of these loans for freelancers, it is convenient to assess some aspects:
  • Consider contracting short-term loans since they are handy to face overdrafts at specific times when liquidity is needed.
  • Look for banking products designed specifically for the self-employed since they better respond to this group’s specific needs.
  • Before smearing for the loan, it is advisable to carry out a thorough business plan that considers the payments. To do this, you can design an amortization table where the interest and capital paid during the loan broke down.

4. Consumer Loans

  • Consumer loans are all those financial operations designed to satisfy personal needs.
  • Therefore, these are credits requested by a consumer who needs to acquire goods or services for non-professional use: the purchase of furniture, the acquisition of an electrical appliance, the need to cover the expenses of a wedding, a trip, etc.
  • Naturally, this product usually offers in the very establishments where the good or service is acquired. It would be a deferred payment.
  • It calmer for the operator to purchase since they can simultaneously contract the financing service without carrying out more procedures or travel.
  • However, the consumer is carrying out the procedure directly with an entity, so the establishment, in reality, would be acting as a mere intermediary.
  • As in traditional loans, the contract usually stipulates the term in which the debt will repay and the interest that the applicant must pay for the instalments’ payment.

5. Student Loans

Student loans are an increasingly common alternative for those interested in enhancing their professional development by completing a master’s degree or accessing specialised courses, doctorates, or stays in foreign universities.

Usually, these types of loans differentiate according to the purpose for which the funds destine:

Loan for scholarships: it is an advance to the student who awards a scholarship to defray their expenses until the institution receives the money for said scholarship.

Loan for tuition: this financial aid destines for the payment of university fees. You can also include an amount to cover the cats for school supplies, accommodation, or food.

Postgraduate loan: It generally use in cases where you want to pursue a master’s or doctorate.

Loan for studies abroad: in this case, the amount intends to cover Erasmus’s expenses or another residence type in a foreign university.

6. Mortgage Loans

  • A mortgage loan is one whose purpose is to grant a certain amount of money that will use for the purchase or restoration of real estate.
  • In addition to involving amounts of money more significant than those of personal loans, this type of financing has a fundamental guarantee for the financial institution.
  • If the client cannot repay the money committed to the loan, the lending company can sell the mortgaged property to repay the debt or become its owner.
  • Thus, having a sufficient guarantee is one of the safest loan operations for the entity that grants it.
  • Due to the high amounts granted, the terms for repayment are usually longer, and the interest rate is lower.
  • The maximum amount decided by the financial institution is usually around 80% of the appraised value of the real estate, and the instalment to pay usually 35% of the net monthly income of the person requesting it.
  • As we have seen, a loan is a commitment that should not take lightly.
  • To face and get the best return, we must acquire a prior knowledge of the types of loans and their particular characteristics and study our financial capacities to face the debt in the established terms.

How does Work Loans?


  • Loans work in different ways, depending on which of them you are applying for it.
  • For practical purposes, a loan carries out when the applicant receives the money or credit line. It is here when he begins to contract obligations with the banking or financial institution.
  • Every loan has costs that the contracting party must pay the lender for the service.
  • These are important to consider to make an informed decision that is consistent with your goals.
  • One of the main tools that can help you with this decision making is the APR.

What Should Consider Before Applying for Loans?

  • Once you have apparent what type of loan will bring you closer to your goals, now is the time to prepare to apply for it and have the best chances of getting it.
  • Dependent on the kind of loans you need to request, the number of papers can vary. Sometimes individual immediate money loans will not ask for much documentation.
  • The essential thing will always be: have a good credit history and not be in a credit bureau.
  • Cleaning your credit bureau will always be an essential step before applying for a loan since this will be your cover letter and the one that will open the doors to better loans.

Elements that Make up a Loans

These are the main concepts that we must know when receiving or working with loans:

Principal Capital

  • It is the amount of money that loan and on which interest will pay based on the loan duration and the risk of the borrower of the loan.


  • It is the financial cost of the loan, that is, the price of money. It is the charge that charge for the use of someone else’s money or capital for a time and represent as a percentage of the principal.


  • Each of the repayment payments anywhere the principal and interest distribute.


  • It is the time during which the loan will use. The term will run from the beginning of the contract until the last instalment pay, thus returning the principal and interest.


  • It is the agent who lends the money and must return it along with some interest.


  • A person receives the capital and must return it as agreed, together with interest.
  • Both the moneylender and the borrower can be individuals or legal entities.

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