Wonder what types of loans exist? We’ve broken them down for you.
Now that you’ve decided to start your lending business, the next thing to do is, well, get to know the business! The first thing to learn about is the different types of loans that you can offer. There are several different types, and you can tailor your loan products to suit you and your borrowers.
An unsecured loan is a loan that is not backed by collateral and is guaranteed only by the borrower’s creditworthiness. Because these loans are not backed by collateral, the lender takes on extra risk and therefore, the rates on these loans can be quite high.
A secured loan is one that is guaranteed by collateral which can be used by the lender to cover losses if the borrower is unable to repay the loan. Examples of secured loans include mortgages and auto loans (the property and car title serve as the collateral).
Fixed Rate Loans
Just like the name says, this type of loan has an interest rate that is fixed for the lifetime of the loan.
Variable Rate Loans
The interest rates on these loans are tied to a base rate set by the lender. The interest rate on a variable interest rate loan at any point in time will depend on the fluctuation rate of the base rate or index. This means that the total interest costs on the loan will rise and fall with time.
Installment credit is a loan for a fixed amount of money which is paid back in a fixed number of installments over a set period of time. The borrower pays a certain amount at fixed intervals (usually bi-weekly or monthly) until the loan is fully paid back. Examples of revolving loans include mortgages, auto loans, and student loans.
A revolving loan is one in which a lender makes a certain amount of money (the limit) available to a borrower. The borrower can take out any amount, up to the limit, any time he wants, and he is only required to make regular payments on the interest.
We will use the following scenarios to explain the different types of loans:
Káyòdé is a Product Manager with a software development start-up. Last December, he made a whopping 250,000 naira in bonuses and other incentives for meeting his targets for the last quarter of the year. He and his wife, Halima, have been talking about finally purchasing a home in Lekki by the end of the year, and are still quite short of their savings target. Káyòdé hears about Lendsqr from one of his clients at work, and rather than just put his money into a savings account or worse still, blow it all up over the Christmas holidays, he decides to put it to work on Lendsqr.
Halima is getting her Brazilian weaves fixed at Bobby’s Salon when she gets into a conversation with Chichi, the stylist fixing her hair. Chichi is trying to set up a side-hustle and wants to import quality hair extensions from India. The only thing stopping her is the fact that she doesn’t quite have the capital to buy her stock. Halima tells her about Káyòdé and Lendsqr. Because Halima has known Chichi for over three years and knows how skilled and ambitious she is, she convinces Káyòdé to make Chichi his first client.
Chichi takes out a loan for 50,000 Naira to start with. Because Halima vouches for Chichi, Káyòdé charges her an interest of 2.5% on the loan. She orders her stock from India and because of their quality, they sell out fast. In two months, she is able to repay the loan to Káyòdé. She then decides to expand her business. She figures that if she borrows 100,000 Naira from Káyòdé this time, and continues to re-invest her profits, she will be able to borrow less and less from Káyòdé, and eventually be able to run the business without having to borrow any more capital. She speaks with Káyòdé and Halima, and they agree to make the 100,000 available to her over the course of 18 months. She will be able to take out whatever amount she needs from it during that time and will only have to pay interest on what she takes out.
- Here, Káyòdé is, of course, the Lender, and Chichi is the Borrower. Káyòdé has extended a Revolving Line of Credit/Loan to Chichi. This loan is also a Fixed Rate loan which is Unsecured.
Lékan, Káyòdé’s cousin twice removed, gets wind that Káyòdé is in the lending business. He comes to visit Káyòdé and asks for a loan of 50,000 Naira in order to buy a Tokunbo car to start a kabukabu business. Káyòdé is wary because he knows his cousin is quite flighty and is always coming up with one “wonderful” idea after the other, each one more ambitious than the next. Each time, Lékan swears by his mother that whatever new idea he has is fail-proof and is sure to make him “hammer” in no time. Also, Káyòdé knows Lékan is one of the chief heroes of the green bottle and that most of his great ideas never make it past the nearest beer parlor. Despite all this though, Káyòdé can’t quite turn Lékan away because he knows that the next thing that will happen will be that he’ll get a summons to a family meeting and he’ll never hear the end of how he thinks he is better than everyone else in the family simply because he managed to go to university. So, he reluctantly agrees to lend Lékan 30,000 naira on certain conditions. The first condition is that Lékan will pay back the loan in full, plus interest, in 6 months because after all, he and Halima intend to buy their house soon. The interest on the loan will be 15%, and Lékan will have to make monthly payments of 5,750 Naira. Lékan protests, saying that the interest and monthly payments are too high. He requests that the rate go down to 12.5% and the pay-back duration up to 9 months. He promises that should he default on payment for any month, his sister, Aduke whom everyone knows is the seamstress to the gods, will go and work in Halima’s fashion design business for free until the missed payment is covered.
- Here, Lékan has obtained a Secured, Fixed Rate, Installment loan from Káyòdé. Aduke, unfortunately, is the collateral for the secured loan. It is an Installment loan because it is for a fixed amount (N30,000) and Lékan is expected to make a fixed number of regular payments (9) of a fixed amount (NGN 3,750) for the duration of the 9 months.
Bànky, Káyòdé’s friend from UNILAG comes to Káyòdé all excited. He’s heard from the grapevine that the man in the White House is about to take to social media on some rant or the other and that as a result, the value of the dollar is about to fall drastically. Bànky plans to make a killing from this. He intends to buy as many dollars as he can while the value is down and then resell when it climbs up again. He asks Káyòdé to borrow him as much as he can afford for a month.
Káyòdé knows this is a high-risk venture but is unable to resist all the same. He strikes a deal with Bànky that would protect his investment should it fail but will make him some money should it succeed. He agrees to lend Bànky the 120,000 Naira he’s got left for a month, but the interest rate would be determined based on the price of the dollar.
Bànky considers this and reckons that it protects him as well since if the whole scheme goes bust and the man in the White House behaves himself, he can at least pay Káyòdé back at a low-interest rate.
- In this scenario, Bànky has obtained a Variable Rate loan from Káyòdé. The Index, in this case, is the percentage rise in the price of the dollar.