Different Types of Loans and Why You Need To Know Each One Of Them

You have bought a new home or planning to start a business, or maybe you’re studying for college and you need additional money. 

Some of you proposed to their girlfriend and are planning to get married soon so you can move into another place or country. 

Whichever your reason is, once in your life, you have taken out a loan. Or planned to take out one. 

But curious, do you know what are the different types of loans and why you need to know each one of them?

Here are the 7 types of loans and a little information about each one:

  • Conventional Loans
  • Conforming Loans
  • Non-conforming Loans
  • Secured Loans
  • Unsecured Loans
  • Open-ended Loans
  • Close-ended Loans

Conventional Loans

It is a mortgage that is not insured by any government agency. That includes FHA, Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). 

Unlike personal loans and other lenders, it is usually fixed in terms and rates. Interest rates don’t change and cannot be changed. 

It also guarantees loans made by private lenders through its Guaranteed Housing Loans program. This backing is paid for by borrowers.

Conforming Loans

It is a type of mortgage that is equal to or less than the dollar amount established by the FHFA. For borrowers who have an excellent credit score, this type of loan is better due to the low-interest rates that are affixed to them. 

Non-Conforming Loans

This type of loan does not meet the guidelines of a government-sponsored enterprise such as Fannie Mae and Freddie Mac. The reason why they weren’t able to meet the guidelines is that these types of loans are not ready to sell. 

These loans either stay in the bank’s portfolio or sell to entities specializing in non-conforming loans. 

One example of non-conforming loans are jumbo loans.

What is a jumbo loan?

Jumbo loans are high dollar loans usually starting at $417,000 in most areas or as high as $625,501 in higher-cost markets. 

Secured Loans

Secured or collateral loan, from its name, is secured as long as the bank operating or the lender is legitimate. 

With a collateral loan, you give the lender the power to take your personal property if things change and you aren’t able to fulfill your debts according to the time needed. 

Interest rates and loan amounts vary, unlike conventional loans. If your property has a higher value and you make it as collateral, then there’s a possibility that you can get a higher loan amount. 

Here is a list of examples of personal property that you can use when you apply for a secured loan:

  • Houses
  • Vehicles
  • Savings account and CDs

Unsecured Loans

The opposite of secured loans, this type of loan is not backed up by collateral. However, the interest rate and the loanable amount depends on what is your credit history. 

Personal, signature, or payday loans fall under unsecured loans. 

If you have a great to excellent credit score, consistent flow of income, and a repayment plan, then this one is a good option for someone like you. 

Open-Ended Loans

These are loans with a fixed-limit line of credit. One great example of an open-ended loan is a credit card. Once you have repaid the credit that you have borrowed, you can borrow again. 


Close-Ended Loans

The opposite of open-ended loans, this type of loan cannot be borrowed again even when already paid. Examples of close-ended loans are student loans, mortgages, and car loans. 

If you feel that you need more credit, you need to apply for a new loan. 


There are different types of loans and each one of them has different uses according to their type. In order for you to know more about which one to choose, it is better to conduct a research first before diving headfirst to it. 

There are restrictions and requirements needed for each type of loan. 

And it is important to know them before you sign an agreement with a licensed money lender.