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4.2 Types of loans
Publication date: 31 May 2022
us Loans & investments guide
ASC 310-20-20 provides the following definition of a loan.
Definition from ASC 310-20-20
Loan: A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable. This definition encompasses loans accounted for as debt securities.
Loans can be characterized in different ways. For example, loans can be described in terms of their credit characteristics (e.g., based on FICO bands, risk ratings), arrangement type (e.g., term, revolving, or demand loans), loan product type, or type of collateral. The following descriptions provide an overview of common types of loans.
See LI 4.6 for information on loan syndications.
4.2.1 Consumer loans
Loans used to fund household and personal expenditures are called consumer loans. Examples of consumer loans include credit cards, personal loans, and auto loans. Consumer loans can be either secured or unsecured.
4.2.1.1 Credit cards
Credit cards are a type of consumer loan. Credit card arrangements are short-term revolving lines of credit that are typically unsecured. The types of reporting entities involved in issuing credit cards ranges from direct card issuers (e.g., a bank) to card sponsors (e.g., airlines, hotels, retailers). Credit cards typically bear a higher rate of interest than other loans and may include some form of incentive for using the credit card (e.g., reward points).
4.2.2 Real estate loans (mortgages)
A real estate loan, or mortgage, is a loan collateralized by real estate property, such as a single-family home, multi-family home, or commercial property. The type of property determines the loan type.
4.2.2.1 Residential mortgage loans
Residential mortgage loans include mortgages secured by single family and certain multi-family homes (i.e., a home with four or fewer units). Residential mortgages include first lien, second lien, home equity lines of credit (HELOC), and reverse mortgages.
Certain residential mortgage loans may be partially insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans’ Affairs (VA). Residential mortgage loans that are not insured by the FHA or guaranteed by the VA are often referred to as conventional loans.
Residential mortgage loans that meet the guidelines of a government-sponsored enterprise (GSE) are referred to as conforming loans. The loan amount must be less than the conforming loan limit, which can vary based on the location of the property securing the mortgage, and must meet certain other eligibility criteria. GSEs generally purchase conforming mortgage loans, securitize the loans into mortgage loan participation certificates by transferring the loans to a securitization trust, and guarantee the timely payment of interest and the collection of principal on the certificates issued by the trust that are sold to investors. Loans that do not meet these guidelines are often referred to as non-conforming or jumbo loans.
4.2.2.2 Commercial real estate loans
Commercial real estate loans are collateralized by a commercial real estate property, such as a shopping mall, office building, hotel, or apartment building.
4.2.2.3 Multi-family loans
A multi-family loan is a loan obtained to purchase a building that is designed to house more than four families, such as an apartment building or condominium. Multi-family loans may also be referred to as commercial real estate loans.
4.2.3 Commercial and industrial loans
Commercial and industrial loans are often used for working capital purposes, purchases of inventory, or capital expenditures. They may be either secured or unsecured and vary from short-term revolving lines of credit to longer term arrangements.
4.2.4 Other loan types
Some of the other common types of loans include student loans, construction loans, and small business loans.
Student loans are used to pay for education costs, typically at the college or graduate/post-graduate levels.
Construction loans are typically structured as a variable-rate line of credit during the construction of a home or other building. Construction loans are often converted into fixed-term real estate loans upon completion of the construction or attainment of another specified milestone.
Small business loans are used to fund the operations of small businesses. These loans may be guaranteed by the Small Business Administration, a US government agency.
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