Types of loans
In my previous article I covered ‘what is a Loan?’
In this article I will cover the types of loans that are predominant in the UAE market.
Open and close ended Loans
Open ended loans are the loans that can be borrowed over and over again. Credit cards or a bank over draft facilities are examples of these loans. You are assigned a credit limit in your account. Every time you make purchase or spend, the credit limit available on the card or the limit of the loan is reduced. To use the credit again, the account holder has to repay the amount used and interest charged to use the limit again. Hence, after repayment, you could use the credit limit all over again to make purchases or spend.
Close ended loans are those that get repaid and can not be used once they are repaid. You will need to apply once again for a loan in order to enjoy the benefits of these types of loans. Personal loans are a very good example of these types of loans.
Secured and unsecured loans
Secured loans are those that are backed by a collateral or an asset. If the borrower fails to repay the loan the bank or the financial institution may liquidate the asset to compensate for the repayment of the loan. Home loans or mortgages are a prime example of this type of loans where the property or the house is pledged as a security or a collateral against the loan. In case the borrowers fail to repay the bank may foreclose the loan and adjust the loan amount.
Unsecured loans are the loans that are not secured by any underlying asset or collateral. All the bank or financial institution gets is the personal guarantee of the borrower. Personal Loans are a good example of unsecured loans wherein the bank does not have any security for the loan.
Conventional Loans and Islamic Finance
Conventional loans are loans that are lent by banks following a convention banking rules. Typically a bank is called ‘conventional bank’ when interest is charged as a time value for money.
Islamic loans or Finance is a type of financing facility which follows Sharia Compliant set of rules as mentioned in the Holy Quran. As per Islamic Finance ‘Interest’ or Riba is prohibited. Sharia compliant institutions instead charge what is known as ‘Profit.’ (I will cover Islamic Finance in detail)
These are in brief the Types of Loans falling under various categories.