What are the Different Types of Loans and Their Classifications?

Learn about different types of loans and their classifications. Understand how loan classifications are determined based on various evaluations such as borrower's financial situation, payment history & sources of repayment.

What are the Different Types of Loans and Their Classifications?

A loan is a sum of money that a person or company borrows from a lender. It can be divided into three main categories: unsecured and guaranteed, conventional and open-ended loans. Before applying for any loan, it is important to evaluate your monthly income, expenses, and credit history. A classified loan is a bank loan that is in danger of default. Classified loans have unpaid interest and outstanding principal, but they don't necessarily have to be overdue.

Banks usually classify such loans as assets that are negatively classified in their books. Loan classifications are determined based on various evaluations, such as the borrower's general financial situation, payment history, sources of repayment, guarantors, and the value of the collateral. Standard industrial classification code or SIC code is a series of four-digit codes devised by the federal government's Office of Management and Budget (OMB) to classify establishments according to the type of economic activity to which they are engaged. Classification means that each position in the classified service must have a designated title, a regular minimum number of hours allotted per day, days per week and months per year, a specific statement of the functions that employees must perform in each position, and the regular monthly wage ranges for each position of that type. Classified loans are those loans that the lender considers to be in danger of default on both principal and interest. In some cases, when a loan is considered classified, lenders may not provide more credit to those borrowers or may completely harden their lending practices. Although they can be risky, classified loans aren't always overdue; they're just in danger of default.

As noted above, financial institutions normally record these loans on their books as negatively classified assets. Loan classifications are based primarily on the loan's maturity period and on the debtors' ability to repay. In addition to the possibility of credit being restricted in the future, borrowers with classified loans really have nothing to worry about. Banks normally classify these loans as a preventive measure in case they have to cancel them as losses. Classified loans have a high borrower default rate and can increase the cost of borrowing for a bank's other customers. The classifications of the loans that will be used to manage them shall be those determined by the Association or external examiners approved by the Association or the FCA.

Loans can also be classified into secured and unsecured, open and closed and conventional types. The lender marking a loan as classified has no direct impact on the borrower's credit history.