What is a Consumer Loan? Types, Categories

Do you require funds to finance some specific expenditure? Then you might have to apply for a consumer loan. Interested in knowing more about this type of loan? Then you are in the right place as here we are going to discuss consumer loans, their types, and categories.

Get an insight about what is consumer loan:

  • Loans given to consumers to finance specific requirements and items are referred to as consumer loans. 
  • To put it in simple words the creditor is giving a consumer loan product to the borrower depending on the specific financial needs of the borrower. 
  • Consumer loans can be secured or unsecured. In secured loans, the consumer gives certain assets as collateral to the creditor. Whereas unsecured loans are not backed by any collateral and hence the lender is taking higher risk in this type of loan.

Overview of different types of consumer loans:

Financial institutions give many different types of consumer loans. The borrower has to choose the right consumer loan product which can fulfill his financial needs. Take a look at some of the types of consumer loans.

  • Mortgage:

If the consumer wants to buy a house then he has to avail of this type of consumer loan. Usually, the loan value is higher than what the person may be earning annually. The tenure for repaying this type of loan is usually longer as compared to some other types of loans.

  • Auto Loan:

If the consumer wants to buy a vehicle then he has to opt for an auto loan. The consumer can get this loan directly from banks or any other financial institution but sometimes the car dealer may also arrange for the loan through a financial institution. In the case of auto loans, the down payment value is high and the loan tenure is short (around 2 to 7 years). This is because car value depreciates very fast.

  • Education Loan:

This type of loan is also known as a student loan and it is used by the consumer to finance the educational needs of the student. The education loan can be used to pay the college or tuition fees. The repayment of a student loan starts after the student completes his education and this is an unsecured loan.

  • Personal Loan:

This loan can be used by a borrower to finance personal requirements like paying utility bills or buying electronic equipment etc. A personal loan is a versatile loan that is used to finance the day-to-day requirements of the consumer and it can either be secured or it can be unsecured.

  • Credit Card:

A credit card is a popular form of consumer loan that is used by the consumer to purchase items that he needs daily like groceries etc. on credit. It is important to repay this loan on time as the rate of interest charged on late payments is very high. If the consumer fails to pay this loan in time then he has to incur a heavy penalty.

Now let us check the differences between secured and unsecured loans:

Secured Loans:

  • In the case of secured loans, the consumer gives collateral. This collateral is an asset owned by the borrower. This asset can be used to recover the loan amount if the consumer fails to repay the loan.
  • In the case of secured loans the consumer can get a higher loan amount, the repayment tenure is longer, the interest rate charged is lower. This is because the creditor has the collateralized assets of the borrower. The lender can liquidate the assets to get his money in case the borrower fails to repay the loan.

Unsecured Loans:

  • In the case of unsecured loans, the consumer does not have to give any collateral. Therefore the lender is taking a higher risk in giving an unsecured loan as compared to secured loans.
  • Therefore in the case of unsecured loans the consumer does not get high loan amounts, the repayment tenure is shorter and the rate of interest charged is higher. If the borrower fails to repay the outstanding amount then the lender does not have any collateralized assets of the borrowers from which he can recover the outstanding amount.

Take a look at the different categories of consumer loans:

There are 2 categories of consumer loans and they are as follows:

  • Open-End Loan:

The other term for this category of consumer loan is revolving credit. The consumer can use this loan to make any type of purchase but he has to repay the loan amount and the interest within a specific time frame. The open-end loan is unsecured and if the borrower fails to repay the loan within the specific time frame then heavy interest is charged.

The best example of an open-end loan is a credit card where the borrower can use the credit to purchase anything. The consumer has to pay the credit card bill within the due date failing which hefty interest is charged.

Closed-End Loan:

The other term for this category of consumer loan is installment credit. A closed-end loan can be used to finance certain specific requirements of the consumer. This category of loan is a secured loan where the consumer has to give collateral to the lender. 

The borrower has to repay the loan in installments over a specific period. If the borrower fails to pay the installments then the lender can recover the money from the assets that the consumer has given as collateral.

Consumer Loans have several benefits:

There are many benefits of consumer loans and we have listed a few of the benefits of this type of loan:

  • There is a wide range of consumer loan products and one can choose the product based on the specific financial requirement.
  • Consumer loans give the consumer financial flexibility and it helps to fulfill the critical financial requirement of the consumer.
  • Consumer loans are useful in debt consolidation.
  • This type of loan makes it possible for the consumer to purchase things like houses which cost much more than the annual earnings of the consumer.

Common Uses of consumer loans:

  • Consumer loans can be used for buying a house and also for renovating the house.
  • These types of loans can also be used to repay an existing loan.
  • One can buy cars for private as well as commercial use with the help of consumer loans.
  • Consumer loans can help in financing your child’s higher education.
  • Loans in the form of credit cards can be used to buy just about anything.


Consumer loans are a boon to borrowers as they help the borrower purchase things that are beyond his financial capacity. This type of loan also helps the consumer to fulfill their immediate financial needs. All that one needs to do is use these loans cautiously and ensure that you repay the loan amount in time. For more details about different types of consumer loans like personal loans connect with renowned financial institutes like Money View.