What Is a Consumer Loan?

by Charles Crawford ; Updated September 11, 2015

Consumer loans are loans that banks and other lenders extend to people for personal or household purposes. They are the opposite of business or commercial loans. All consumer loans must comply with consumer protection law such as the Truth in Lending Act of 1968, as implemented by Regulation Z, which requires clarity of key terms in credit agreements and disclosure of all costs.

Installment Loans

This is the popular type of loan that enables borrowers to acquire an item such as a house, an automobile or an appliance and pay for it over a period of months or years. Installment loans are repaid at regular intervals, usually monthly, and each payment includes a portion of the principal amount and some interest. While the loan is being repaid, the lender retains a security interest (ownership) in the item being financed.

Time Loans

In situations where a borrower needs cash for a specific period of time such as 90 days or one year, he can obtain a single-payment loan from his bank. A typical purpose for such a loan is to finance a purchase temporarily until the borrower can arrange permanent financing. Time loans are repaid in full, including interest, on the maturity date of the promissory note.

Lines of Credit

Many consumers need short-term cash advances from time to time. If a consumer's income fluctuates, she may want to obtain a personal line of credit from her bank. She can draw cash advances as needed and repay the advances from income and repay principal at a time of her choice. The bank will bill her for interest payments. Personal lines of credit can be offered in conjunction with credit cards.

Home Equity Loans

A homeowner can use the equity in his house (i.e., the difference between the amount he owes on his mortgage and the current value of his house) as security for another loan. He will execute a second mortgage for the home equity loan. The new loan can be for up to 80 percent of the available equity. A traditional use for such a loan is to finance some improvement to the home such as building a wing or a new garage.

Student Loans

Several types of student loans are available for financing the cost of higher education. Students may borrow from lenders directly, or parents may borrow and use the funds for their dependent children. Interest rates are lower than with normal loans because interest payments are partially subsidized by the federal government. Students can delay the start of their loan payments for six months after graduation or after they leave full-time enrollment.

About the Author

Charles Crawford, a former commercial banker, has been a business writer in New York since 1990. He has produced marketing materials for an executive outplacement firm, written the quarterly newsletter of a medical nonprofit organization and created financing proposals/business plans. Crawford holds a Bachelor of Arts in English and a Master of Science in international affairs from Florida State University.