What Are the Functions of Loans?

Individuals and organizations can apply for loans for a wide variety of reasons. When people think of loans, they typically only consider auto loans and home loans. Lenders, however, market a wide variety of loans for many different purposes. Each type of loan has its own risks and standard terms, depending on its function. Lenders may be more willing to make certain types of loans than others based on their purpose.

One of the primary functions of loans is to help borrowers purchase assets. For individuals, this usually means buying a piece of property or a car or a similar large purchase. Businesses, on the other hand, have a wide variety of assets that they need, ranging from factory equipment to expensive computer software and hardware. Both individuals and organizations usually need to take out loans to buy these larger assets.

Investment loans are made specifically for investment in stocks, bonds or other types of securities. Investment loans can come from a variety of sources. Sometimes brokerage firms will make loans available to investors so they can purchase extra securities. At other times, banks will make investment loans themselves, especially to businesses that are interested in growth or acquisitions.

Another popular function of loans is aid in debt management. Debt management seeks to restructure an individual's loans so that the borrower can continue making payments if they are having revenue problems. The process of debt consolidation typically replaces a number of small debts with one large loan that offers better terms. Debt consolidation loans, like refinances, help borrowers get their debt under control.

Lenders also give out construction and improvement loans to both organizations and individuals. It is more common for businesses like contracting firms to seek out construction loans for large building projects. Improvement loans are designed to help owners make additions to their property or repair large-scale damage.