A loan is a transaction where an individual or organization or borrows money from another individual or organization on certain terms and conditions. The underlying principle is that the borrower will repay the loan amount to the lender within a mutually agreed time frame. The borrower also must pay the interest on the principal along with any other financial charges. If the loan amount is high, the lender can ask for collateral to support the transaction.
Types of loan
The following are different types of loans:
- Secured Loan: In some of the loan types, the lender would ask you for a collateral for your loan. The reason being, if due to some reasons you default on the loan, they will be able to recover the amount using the collateral. In such loans, the lender usually does an assessment of the collateral to figure out the current value so that they can proceed with the loan. Because of the involvement of collateral, secured loans usually have lower interest rates when compared to unsecured loan types. Home loan or vehicle loans are the ideal examples of a secured loan.
- Unsecured Loan: All the loan types that do not require the borrower to provide with any collateral come under unsecured loans. This loan type is usually a bit difficult to get your hands on as compared to a secured loan. As there is no collateral involved, the interest rates are usually a bit on higher side and your credit history acts as the main catalyst in getting you a loan. Some lenders also take a look at your work history to ascertain that you will not default. In the event of you being unable to repay the loan, the lender will have to resort to lawsuits or even debt collectors.
- Open-end loans: An open-ended loan is one, where you can borrow again and again. A credit card is an apt example for it. Of course, there is a ceiling to the amount that one can borrow or take a loan of. Every time you borrow some amount, your purchasing power reduces. Once you pay back a portion of it or the entire amount you regain your purchasing power. Thus, you can borrow over and over without having to worry about exhaustion, as long as you adhere to the rules and regulations.
- Close-end loans: An applicant cannot keep borrowing multiple number of times once he repays the primary loan. With every installment or repayment, the entire principal amount goes down, but that doesn’t open up an avenue for new borrowing as was the case with open-end loans. For certain types of loan, you can, however, opt for a top up on the existing loan, but that again is limited to a certain percentage of your main loan. If you need another loan, you will have to go through the entire process all over again. Auto loans, mortgage loans and study or student loans come under the closed-end loan category.
There is a lot of categories that you can split loans into. The following are some of the types of bank loans.
- Personal Loan: All major banks and lenders provide their customers with personal loans. You can pick up a personal loan for any expense type starting from paying off an existing debt to getting those fancy furniture you have been waiting for a long time for. Lenders usually do not meddle with what you are doing with the loan. And as a general practice they look at your income proof or other assets so as to be sure that you will be able to repay the loan, as a personal loan is an unsecured loan type. The application forms of personal loans are usually much shorter when compared to other loan types. And depending on your assets or income, you can secure a loan for few hundred dollars to a few thousand. On the flip side, these loans have relatively higher interest rates. Thus, making it impractical for funding large usages.
- Line of Credit Loans: A line of credit loan or advance loans fits in perfectly into the portfolio of a small business owner. You can use the line of credit loans to buy inventory or other business operations costs without causing a dent into your savings account. Depending on the cash available with your banking account, a bank would provide you with a ceiling of loan contract. And whenever there is a need for cash, you can use the line of credit to make the payments and repay the bank back. You would end up paying interest amount only for the duration where you utilized the line of credit till the time you repay the same. The interest rates for such loans are usually lower as the risk element involved is pretty low.
- Credit Card: A credit card essentially allows you to take short term loans from a bank without having to go through the loan procedure for each transaction. Their acceptance by a large number of merchants makes them a very attractive form of loan. When you purchase or make payments using a credit card, you will have to repay the amount at a later point in time. The interest rates for credit cards are also a bit on the higher side, but as long as you use them within your limits, they can turn out to be great assets.
- Home Loans: A home loan is a secured loan that an individual or organization can use to purchase any real estate property. The loans allow you to buy the property without having to pay the entire amount up front. In fact, you can own the property by just paying a small portion of the property value up front. As a borrower, you are expected to repay the entire loan along with the applicable interests. If you fail to do so, i.e. repay the loan amount, the lender or bank can foreclose the property and close the loan.
- Vehicle Loans: A vehicle loan allows you to purchase your dream car by paying a small down-payment. Vehicle loans are secured loans, as the vehicle acts as the collateral for it. Inability to repay the loan on time would result in the bank or lender seizing your vehicle to make up for their losses.
- Signature Loans: Signature loans primarily work on the trust of the bank or lender on the individual. It is at times referred to goodwill loan or even character loan. Think of it as a different form of personal loan, where the bank need not know the reason for the loan and your signature ensures that you will repay the loan amount. As this is a non-secured loan type, the interest rates are on the higher side. The banks or lenders do some background check before giving out signature loans. They primarily look for a good credit history along with enough income to repay the loan.
- Micro Loans: Loans for small business setups, usually for startups and in some cases business units that are newly launched are known as micro loans. There are several banks and financial institutions that provide small businesses with micro loans. You can use the micro loans for stacking up inventory, purchase equipment, other stuff such as furniture, machines etc. Depending on your lender, the term of the loan and interest rates vary.
There are a variety of loans on offer by various lenders and banks. It might sound pretty lucrative and attractive, but do keep in mind to repay the amounts on time. Failing to do so would result in unnecessary fine and charges, which will again increase the overall cost of the loan.