6 Common Types Of Loan Today

In today’s daily consumption activities to business investment, in addition to using own capital, borrowing has become a fairly regular activity of many people. Borrowing money not only helps solve short-term financial problems but also supports in investing, doing business, or purchasing large assets. However, different types of loans have their own characteristics, and to choose the right type of loan, you need to understand the current types of loans and their unique characteristics. This article will provide an overview of the common types of loans today, giving you more grounds to consider when making a decision.

1. Personal Consumer Loans

Definition

Personal consumer loans are a popular form of borrowing money for personal consumption purposes such as shopping for goods, services, buying houses, cars, household appliances, paying expenses, or other expenses. These loans are often provided by financial institutions such as banks or financial companies with the goal of satisfying customers’ shopping and consumption needs.

Characteristics of consumer loans

• Consumer loans are a common type of loan because this form of loan does not require collateral. Therefore, customers can borrow money without having to mortgage any assets such as houses, vehicles, or land. To borrow capital, consumers only need to prove their personal income and ability to repay their debts.

• The procedure for personal consumption loans is usually simple and fast. The limit of personal consumer loans can range from a few million to several hundred million dong, depending on the borrower’s financial ability and the bank’s policies. However, the interest rate on consumer loans is usually higher than other common types of loan because this is a type of loan without collateral, so the risk of the lender will be higher. 

• Consumer debt from overdraft loans: is a common type of loan that arises when the bank licenses customers to spend more than the amount on the customer’s account. Customers will receive an advance of a maximum overdraft limit depending on the customer’s credibility, also known as a credit score. This type is often chosen by customers in cases where they need to spend an unexpected amount urgently.

Benefits and Limitations

The benefits of personal consumer loans include flexibility and convenience. Borrowers can quickly access capital to meet urgent consumer needs without collateralising their assets. This is especially useful in emergency situations such as medical treatment, home repairs, or other unexpected expenses.

However, personal consumer loans also have limitations. High interest rates are a minus, requiring borrowers to carefully consider their ability to repay their debts. If the borrower fails to repay the debt on time, the borrower may have to incur penalties and fees, leading to a pile of debt. Besides, personal consumption borrowing can affect the borrower’s credit score if they do not manage the loans well.

2. Credit Loans

Definition

A credit loan is a loan that arises when a person uses a credit card to purchase goods and services, allowing the borrower to spend first and pay later. It is a common type of loan for daily spending and shopping needs.

Characteristics of credit loans

• Credit loans are also a type of loan that does not require collateral. Each credit card has a defined credit limit, which is the maximum amount that a user can borrow from that credit card. This limit is granted based on the credit reputation of the credit card user.

• Credit cards often have high interest rates, especially if the user does not pay off the balance within the payment term. This interest rate can range from 15% to 30% annually. If the user fails to pay the minimum amount or is late in payment, they will incur additional penalty interest. This penalty interest rate is usually higher than the regular interest rate.

• The credit loan process is simple, customers only need to register for a credit card and can use it immediately after being issued.

Benefits and Limitations

Credit loans bring convenience and flexibility to borrowers. The nature of credit cards is that they are postpaid, so credit card users can shop in advance and pay at the end of the term, creating convenience in spending.

Credit card debt management can affect an individual’s credit score. Some users who are knowledgeable about each bank’s credit card policy can take advantage of this to raise their personal credit score, giving them access to larger loans with lower interest rates.

Essentially, paying on time and good debt management will improve your credit score, while late or non-payment will reduce your credit score, as well as potentially lead to debt piling up and financial burden

3. Personal Loans

Definition

A personal loan is a form of borrowing money that an individual borrows from financial institutions such as banks, financial companies, or from other individuals for personal or family purposes, or for personal investment. This type of loan is usually managed by a loan contract with clear terms and conditions.

Features of personal loans

• Besides purposes such as shopping and consumption, personal loans are often used for personal investment purposes, and these loans are usually larger than consumer loans or credit loans.

• The interest rate for a personal loan is also determined based on the individual’s credit risk, and depends on the agreement between the borrower and the lender. The loan interest rate also depends on the repayment term. 

• Personal loans have clear terms and conditions, including the loan amount, interest rate, repayment period, and additional conditions such as guarantees, insurance, or other fees.

Benefits and Limitations

A personal loan is a flexible financial instrument for individuals that helps them meet their personal financial needs, especially their investment intentions, without relying on their existing assets.

However, in order to be able to borrow a personal loan with a large enough investment, individuals will often be required for forms of security such as personal assets, financial documents or personal credit. At the same time, personal loans often take longer because the parties need to agree on issues related to the loan contract before making a loan as well as disbursing the loan.

4. Unsecured loans

Definition

Unsecured loans for businesses are a type of loan where businesses do not need to provide collateral. Instead, loan approval is based on the reputation and financial capabilities of the business, including credit history, revenue, and other financial factors. Unsecured loans help businesses, especially small and medium-sized enterprises, to access capital quickly to serve business goals.

Characteristics of unsecured loans

• With this type of loan, businesses do not have to provide assets such as real estate, equipment or goods to secure the loan. The limit for this type of loan is usually granted based on the credit history of the business itself.

• The procedure for unsecured loans is usually simpler and the approval time is faster than mortgaged loans, helping businesses access capital in a timely manner.

• Although the procedure is simple, the conditions for unsecured loans are more difficult. Banks often scrutinise a business’s credit history and financial ability to decide on loan approval.

• The interest rate of unsecured loans is usually higher than that of mortgaged loans due to higher risks for banks or credit institutions.

Benefits and Limitations

The benefits of unsecured loans include the ability to access capital quickly, without the need to search for and provide collateral, helping businesses maintain flexibility in financial management and business expansion.

However, the drawbacks of this form of borrowing are high interest rate pressure, strict requirements on credit and repayment, as well as loan limits that are often lower than loans with collateral. Therefore, businesses need to carefully consider and evaluate in detail before deciding to use this form of unsecured loan to ensure sustainable business and financial performance.

5. Business Loans

Definition

A business loan is a type of loan for businesses to invest, expand their business, or manage capital with the desire to generate profits or financial benefits. invest in business, scale, or invest in new projects. This is a popular form of loan for small and medium-sized businesses, helping them access the capital they need to grow.

Characteristics of business loans

• Business loans typically require the business to provide collateral to secure the loan, depending on the bank and the loan. Business loan limits can be flexible and often high, depending on the needs and financial capabilities of the business.

• Business loan interest rates are often preferential to encourage businesses to invest and develop. Normally, the interest rate will be fixed in the first month, and in the following months, the bank will apply preferential interest rates from time to time.

• The term can be from 6 to 48 months depending on the bank’s regulations and the business objectives of the loan. For example, a loan to invest in equipment, machinery, and factories will have a shorter loan term than a loan to invest in a new project.

• A business loan is a form of loan that is governed by a loan contract with specified terms and conditions, and this loan contract is usually according to the form of the lender being a bank or other credit institution.

Benefits and Limitations

Business loans bring many benefits to businesses, helping them access the capital they need to invest and develop. Preferential interest rates and high loan limits are the strengths of this type of loan, creating favorable conditions for businesses to expand their scale and invest in new projects.

However, business loan procedures are often complex and require a lot of supporting documents, requiring businesses to have a clear business plan and strong financial capacity. Managing your business loan effectively and having a specific repayment plan is crucial to ensure you don’t run into financial difficulties.

6. Trade Credit

Definition

Commercial credit is a credit relationship between enterprises in the form of buying and selling goods. Accordingly, the seller (supplier) allows the buyer (customer) to purchase goods or services and pay after a certain period of time. This is a popular method for businesses to manage cash flow and maintain commercial relationships with customers.

Commercial Credit Characteristics

• Lenders and borrowers are both businesses directly involved in the production and circulation of goods.

• Commercial credit lends in goods. The buyer receives the goods or services immediately but can pay later, usually for a short period of time (30, 60, or 90 days).

• Unlike other types of credit, commercial credit usually does not require collateral. Trust and credit history between the two parties are key factors.

• Commercial credit is usually interest-free if paid on time. However, if the buyer pays late, they may incur penalty fees or high interest rates.

• Credit terms such as payment terms, early payment discounts, and late fees are clearly agreed upon between the buyer and seller.

Benefits and Limitations

Commercial credit offers many benefits for both suppliers and buyers. For suppliers, trade credit helps attract new customers, strengthen buyer loyalty, and boost sales through incentives such as bulk discounts. For buyers, trade credit facilitates startups, provides a competitive advantage, and helps maintain the supply of goods even when finances are unstable. In addition, commercial credit also helps businesses retain cash, promote business growth, and enhance their reputation by maintaining a good credit history.

However, commercial credit also comes with limitations. For suppliers, the biggest risk is late payments and bad debts, which can lead to serious cash flow problems. In addition, suppliers incur costs for commercial credit management and related special departments. For buyers, commercial credit can increase input costs, lose the opportunity to reduce prices, and if they don’t pay on time, they will incur penalties and high interest rates. Delays in payment can also discourage suppliers and cause future supply issues. The management and accounting costs associated with commercial credit can also increase, requiring businesses to invest in specialised management departments. Strengthening trade relations: This form of credit helps to strengthen commercial relationships between businesses, facilitating continuous transactions.

In short, borrowing is an important financial tool in the modern economy, helping individuals and businesses manage their cash flow and invest in the future. Each type of loan has its own characteristics and is suitable for different needs. Understanding common types of loans today will help you choose the right loan option and manage your finances more effectively. When considering taking out one of the most common types of loans today, it is important to carefully consider your loan conditions, interest rate, and ability to pay. Besides, maintaining a good credit history and managing common types of loans responsibly will help you avoid financial risks and build a solid financial future.

The above is an overview of common types of loans today. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms specialising in business law in Vietnam that has leading practice areas in the legal market such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing Clients with optimal and effective service.