Understanding the Types of Loans: A Guide for Single-Payment, Bond, and Consumer Loans. 

Loan structures and financing can be complex, and this guide breaks down a few common loan structures to understand how they operate. 

Single-Payment Loans aka One Payment at Maturity.

Single-payment loans are ubiquitous in commercial and short-term lending. A single-payment loan is structured differently than a conventional mortgage or car loan when you are paying it off with periodic payments.  

• How it works: You borrow the entire loan principal up front, avoid periodic payments. Instead, you repay the whole loan amount (the principal) plus all the interest accrued over the term in one larger single payment, often at maturity.

• Common Uses: These loans are most commonly used to finance short-term business needs or bridge loans.

• Note: Some loans, such as a “balloon loan,” can combine smaller routine payments with one final pay-off (which is much larger than incidences) with the same principal and interest, so the calculation of this section will relate to loans that are paid entirely at maturity.

Bonds: Loans to Corporations and Governments

Bonds are loans made by investors to corporations or governments, with a known maturity value.

•    Face Value (Par Value): This is the amount the bond issuer agrees to pay the bond holder upon maturity, assuming the issuer does not default.

•    How Bonds Pay: As a coupon bond, bonds pay the bondholder interest periodically (known as “coupons”). Payments are calculated as a percentage of face value and are usually semi-annual payments.

•        As a zero-coupon bond, bonds do not pay interest periodically and often sell in the market for much less than face value. The profit for the investor is the difference between the amount they purchased the bond for and the face value at maturity. Please be aware the calculator on this page is for zero-coupon bonds only.

•    Market Adjustment: After a bond has been issued, the price of the bond will rise or fall due to fluctuations in changing interest rates and other market conditions. These conditions do not affect the value at the time of maturity but do affect the price if the bond is sold prior to the maturity date.

Consumer Loans: Secured versus Unsecured

When people take out a loan, it generally falls into one of two categories – secured or unsecured.

Secured Loans

A secured loan means that you have put up something you own to guarantee the loan.

•     How it works: You have pledged to the lender a specific asset, such as a house or a car. The lender has attached a lien to that asset, giving them the legal right to take and sell it in the event of default.

•    Examples: The most common secured loans are mortgages (secured by the house) and auto loans (secured by the car). Defaulting on the loans will result in foreclosure or repossession.

•    Advantages for Borrowers: Because of the lower risk to the lender, secured loans typically offer the borrower:

1.      Better odds of approval

2.        More money

3.        Less interest

4.    Important: If the asset is sold and the lender only recovers a portion of the debt, you still may be liable for repayment of the balance.

5. Loans Without Security

A loan without security offers you borrowed money without requiring any collateral. The lender offers you the loan based only on your promise to pay them back.

Here’s how it works: Because there is no asset for them to take possession of, the lender will lean heavily on your creditworthiness to decide whether or not to lend you money. There are basic guidelines that lenders use to assess your creditworthiness, which they refer to as the Five C’s of Credit:

1. Character – your credit history and credit repaying record.

2. Capacity – your ability to repay debt in relation to your income (also known as your debt-to-income (DTI) ratio).

3. Capital – an overall assessment of your financial situation including savings, investments, and other properties.

4. Collateral – (unlike a secured loan, this does not apply to unsecured loans).

5. Conditions – what you intend to use the loan for (what are the loan proceeds going to be used for) and the current economic situation.

Common Features: Because unsecured loans can be much riskier to issuers of debt, unsecured loans will have higher rates of interest as well as often have lower limits of borrowing and a shorter repayment period than secured loans.

Additional Borrower Commitments: A lender may ask an unsecured borrower to have a co-signer. A co-signer is someone who promises to repay the debt loaned to you if you default on the loan repayment.

Default Consequences: If you default, the lender usually cannot repossess your property immediately, that does not mean that the lender won’t seek to recover the funds after a legal process. The lender could also hire an outside collection agency to try to recover what’s owed by you as well, along with the negative impact to your credit score.