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Categories of Loans

As a loan officer, five of the most common loan types you'll handle are as follows: mortgages, seed or working capital for small businesses, automotive loans, school loans, and personal loans. This article outlines the major types of loans on the market, their prevalence, and specific areas of knowledge associated with each.
Loan Officer: Pigeonholing

Not certain of the type of loan officer you want to be?

Or, possibly you don't want to specialize in any one type of loan product but prefer to be more of a generalist.
Well, in weighing your options, you may want to consider the broad array of loan types that exist, the specific features of each, and the significant skills that, as loan officer, are good to have when representing such financial service products.
Five Major Categories of Loans

In the interest of space, we will narrow down the types of loans in this article to the five major ones:

  1. Mortgages.
  2. Auto Loans.
  3. School or College Loans.
  4. Small Business Loans.
  5. Personal Loans.
Mortgages

Along with comprising one of the largest sectors of the financial lending industry, mortgages also carry with them the most rules and special regulatory procedures of all loan types.
In legalese, a mortgage is a loan that while issued for the purpose of purchasing real estate is secured by a lien on the property.

In greater detail, a mortgage is a loan obtained by the new property buyer for the purpose of paying off the seller in full. In exchange for this privilege, the buyer is then indebted to the mortgage lender not only for the total amount borrowed but also for any additional interest and fee amounts.

Viewed to be a form of collateral or a guarantee of payment, the deed or ownership title is held by the lender until the buyer is able to pay off the mortgage in full. In the interim, however, the buyer continues to rightfully occupy the property.


And while similar in many respects to other types of loans, mortgages are unique in the sense that they involve the following components:
  • Property. This is the physical residence being financed; increasing numbers of restrictions apply to the types of lending that is possible.
  • Borrower. The borrower is the person borrowing the funds that either has or is creating an ownership interest in the property.
  • Lender. In most mortgage related instances, the lender tends to be a bank or other type of formalized financial institution.
  • Principal. This is the original size of the loan, which may or may not include such additional costs as lending charges, penalties, and interest rates.
  • Interest. Interest is the financial charge assessed for use of the lender's money.
  • Foreclosure or repossession. Probably the most telling feature of a mortgage is the possibility that the lender may need to foreclose, repossess, or seize the property should the borrower fail to meet the terms of the mortgage loan.

Perhaps more strictly regulated than other forms of loans, mortgages tend to be predominantly governed either directly (according to regulatory policies) or indirectly (by impacting participants' actions through the micro- or macro-management of the financial markets, for instance, the banking industry) by the Federal and individual state governments.

Mortgage markets also are often unique in that they encapsulate greater numbers of changes typically than those of other types of loans, for example, auto and schools loans.

Yet, the advantage of mortgages is that the accompanying interest rate tends to be lower than that on personal loans or credit cards on account of the extended number of years it takes the borrower to repay the loan. Typically, mortgage loan repayments are made monthly and have a term of around 25-30 years.
Real Estate and Mortgage Statistics

All in all, it is projected that over $900 billion will be spent on mortgages in 2011.

Nationally, the average mortgage interest rate for a 30 year fixed rate mortgage hovers around the 5.88% mark; although this tends to shift quite a bit with ups and downs in the financial markets.
http://activerain.com/blogsview/453305/Average-Mortgage-Interest-Rates
Auto Loans

As the price of an automobile tends to fall within specific guidelines, for instance, $12,000-$50,000, loans granted for the purchase of an automobile (versus a home or a school loan) are a bit easier to quantify. As a general figure, the average car loan tends to run in the $19,000-$34,000 range.

According to Edmunds.com, in the United States, the average down payment for a car is $2,400, while the average amount financed is $24,864, and the average monthly automotive payment is $479. At present, the most popular automotive loan term is a payment plan extending for 5 years.

Based upon figures released by the National Automobile Dealers Association, on average, between 16 and 17 million units (cars) are sold per year. And, if you figure not all consumers have the cash flow to pay outright; you can well imagine the number of automobile loans that will be needed to facilitate such large numbers of sales.

Joining forces, all of major automobile finance organizations, for example, the National Automotive Finance Association, the National Automobile Dealers Association, the American Financial Services Association, and the Consumer Bankers Association, encourage auto dealers to clearly disclose key finance items to buyers when selling vehicles.

Such disclosures, known in the industry as "voluntary standards," inform the buyer that the rate of the finance charge may be negotiated with the dealer and that the dealer may retain a portion of the finance charge.

School Loans and College Loans

On an annual basis, the average student at a four-year college pays $19,710 for tuition and fees, plus $7,144 in room and board. In addition, the average student at a four-year private college pays $843 per year for books and supplies.

*Source: Annual Survey of Colleges, The College Board, New York, NY

Hence, you can easily see why the decision for a student to attend a higher education institution becomes one of the most important decisions they will ever make, both because it is an expensive proposition and it is a potentially life altering endeavor.

However, with tuition costs on the upswing*, in order to cover the costs of not only tuition but also of rent and books and materials, students often need to seek out specialized sources of funding.



*Over the course of the past decade, tuition, fees, room and board at public four-year colleges have sharply increased by 38%.

And while scholarships and grants can be very helpful, in the majority of cases, they a) tend to be competitive and b) do not always cover all of a student's expenses.

Thus, in order to ensure students are fully covered for a two or a four year college experience, a wide range of loans have been designed with their specific needs in mind.

As a means of financing their college education, greater numbers of students have had to borrow large sums of money, referred to as financial aid. According to the College Board, during the 2003-04 academic year, the latest period for which figures are available, the median debt for those with bachelor's degrees was $19,300.
As a whole, financial aid refers to the wide offering of programs designed to help students and families pay for college or graduate school. Since 1987-88, institutions have more than doubled the amount of grant aid they provide, from $5 billion to $12 billion in inflation adjusted dollars.

Primarily, there are three forms of student financial aid grants and scholarships, which do not have to be repaid, loans, which do have to be repaid, and work-study loans, which provide aid in exchange for work. The three major sources that provide the bulk of student financial aid are the Federal government, state governments, and colleges and universities.

And while the Federal government is the largest single provider of student assistance, underwriting some 72 percent of all financial aid available, mostly through loans; private sources of aid, such as corporate scholarships from companies and nongovernmental loans, also are available.

Note: The second most common type of student financial aid is in the form of grants. Nearly 20 percent of available aid from grants comes from colleges and universities.

Small Business Loans

For those thinking of starting their own business or expanding their existing business, a small business loan may cover the expense.

According to the Small Business Administration, in order to qualify as a small business in the United States, a company must be organized for profit; must operate a place of business located within the United States; and must make a significant contribution to the U.S. economy through the payment of taxes or use of American products, materials, and/or labor.

The following guidelines outline the basic parameters within which small businesses fall:
  • Between two and 500 employees.
  • Profits not exceeding $5 million for most retail and service industries; $17 million for most general and heavy construction industries; $7 million for all special trade contractors; and $0.5 million for most agricultural industries.
  • Typically, companies within the small business bracket do not exceed $25 million in revenue on an annual basis.

According to a blog on the Washingtonpost.com, in the 2006-2007 business year, the number of small business loans under $1 million increased by 15 percent from June 2006 to June 2007.

In addition, the Small Business Administration's Office of Advocacy reported that loans valued at between $100,000 and $1 million increased by approximately 32 percent.

During this time period, approximately 8,600 institutions made 24.5 million loans valued at $685 billion. As compared with the previous year, there were 21 million loans totaling $634 billion the prior year.

By and large, common reasons cited for taking out a small business loan include:
  • Purchasing real estate to house the business.
  • Covering construction, renovation, or leasehold improvement costs.
  • Purchasing furniture, fixtures, machinery, or equipment for the business.
  • Stocking the business with inventory.
  • Providing working capital.

Based upon the client's needs and resources, the loan officer helps to determine the appropriate type of loan.

Personal Loans

For those wanting to take a well deserved vacation or honeymoon, pay for medical bills, perhaps pay for a grandiose wedding, or simply wishing to consolidate their debt, personal loans are often the appropriate types of loan.

Under the scope of personal loans, the maximum limit is $100,000. The specific amount loan officers ultimately end up providing is dependent upon two factors, the individual's credit history and the state in which the individual lives.
 
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