The types of loans offered in Nigeria differ from one another by the terms of the loans.
Learning the differences between the various types of loans can help you evaluate your lending needs and weigh your options—you’ll have a better understanding of which loan will best suit your needs and how to evaluate the terms offered by various lenders. There are many different types of consumer loans. Some of the most common include
- Secured loan: This type of loan requires an asset to secure the loan. If the borrower defaults on the loan, the lender has a right to take the collateral. Secured loans are commonly used when buying a vehicle. With a secured loan, the lender will insist on some sort of security against the money you borrow, often a house or car. If you default on the payments, the bank or building society can then sell the asset to clear the debt.
You can usually borrow large amounts with a secured loan, and at a lower rate of interest. Plus, you can pay back the debt over a long time period, perhaps ten or 15 years.
However, secured loans are more risky than unsecured loans because you could lose your collateral if you cannot clear the debt. You should therefore think very carefully – and consider other options – before taking out a secured loan.
- Unsecured loan: There is no collateral required on an unsecured loan, thus the interest rates are normally higher than for an unsecured loan due to the higher risk to the lender. An unsecured loan, often referred to as a personal loan, is not secured against any asset. Of course, you still have to pay the money back and the lender could pursue you into court if necessary to get its money back. But you don’t have to put up your house or car as collateral.
- Single payment loans: Single payment loans allow borrowers to borrow an amount of money, then agree to repay that amount in full at some point within a fixed amount of time.
- Monthly payment loans: These types of loans require the borrower to repay the loan principal and interest with a fixed amount each month. The repayment dates are scheduled at the start of the loan.
- Salary advance loans: People who borrow cash for a short time period, usually between paychecks, may use personal loan companies that offer salary advance loans; these are often short-term, low amount loans with high interest rates and fees.
- Mortgage: A mortgage is a personal loan that you take out to purchase your home, and is the way for many to achieve their goal of property ownership. In Nigeria, mortgages are available both through banks and the country’s National Housing Fund. The mortgage loan is made up of three components: principal, interest and collateral. The principal is the amount of money you are borrowing to purchase your home. Interest is the annual rate you pay to borrow the money – calculated as a percentage of the total principal. Collateral is the asset or assets used to secure the loan.When you apply for a mortgage, you pay a portion of your monthly paycheck to the lender or bank that has made your loan. The loan’s collateral is the home you have purchased with the proceeds, meaning that if you are unable to make payments, the lender is legally allowed to repossess that property to cover their expenses. In many cases, when you are given a mortgage, you are also required to take out an insurance policy on the property you have purchased.
- Fixed-rate loans: Most consumer loans are fixed-rate loans. Fixed-rate loans keep the same interest rate throughout the life of the loan.
- Variable-rate loans: The interest rate on variable-rate (or “adjustable-rate”) loans moves up and down based on the changes of an underlying interest rate index (usually the prime rate). Interest rates on these loans usually have caps or limits on how high it can move in a given period, but the rate can change multiple times during a year. The interest rate on a variable-rate loan may initially be lower than a fixed-rate loan, but it could move higher over time.
- Installment loans: A loan that is repaid over time with a set number of scheduled payments. The term of loan may be as little as a few months and as long as 30 years. A mortgage, for example, may be considered a type of installment loan.
- Secured loans: These loans are backed up by a large asset as collateral, which would be forfeited if the loan is not repaid. A home equity loan is an example of a secured loan and your house would serve as the collateral. If the loan is not repaid, the lender would be entitled to take the house.
- Unsecured loans: These loans do not require any collateral and are generally only given to borrowers with very high credit scores. The interest rates for unsecured loans are often very high.
- Convertible loans: These are loans that can be changed from one loan type to another—from a fixed to a variable rate and vice versa. One of the most common types of convertible loans is an adjustable (variable) rate mortgage that can be converted to a fixed rate loan.