In financial terms, a loan is a borrowing of funds by one or many people, companies, institutions, or other entities to another persons, companies etc. The borrower is normally liable to repay the interest on this loan until it is fully paid and also to settle the total principal amount borrowed. Lenders offer loans to people at varying terms, including the period of repayment, and interest rates. The borrower can make use of collateral to secure a loan. Collateral may be any property such as land, building, personal estate, bank deposit, car, etc.
Generally, there are two types of loans available, secured and unsecured. A secured loan involves the pledging of property as collateral with the lender. That is, the borrower has to pledge something valuable to the lender in return for the loan amount. If the borrower defaults in repaying the loan, the lender may repossess the pledged property to regain his money. With unsecured loans, on the other hand, there is no need to pledge collateral. However, the borrower must have good credit to qualify for an unsecured loan.
Since there are different types of loans available to people, one must understand the pros and cons of these loans to get the best deal. As mentioned above, secured loan offers borrowers greater leverage; however, this also means greater interest rates and greater penalties if payments are delayed or defaulted in repayments. Unsecured loan offers lesser leverage for the lender but offers higher interest rates and shorter terms. Borrowers may have to pay higher interest rates than secured borrowers because of the greater risk posed by unsecured loans to a third party in exchange for the loan amount.
Another type of loan is revolving loans. In a revolving loan, the interest rate is fixed for the entire period of the loan. During the fixed-rate period, the monthly payments remain at the same rate unless the lender increases it. The interest rates of revolving loans may be variable or set for a fixed period in each loan. Fixed-rate revolving loans allow borrowers to use the money saved as a loan rebate; if the balance gets zero, the borrower will have to repay the full amount. In addition, while paying back the revolving loans, one must take care not to fall behind other creditors.
Homeowners can avail unsecured loans against property. This allows them to borrow bigger amounts without securing traditional creditworthiness. The downside to unsecured loans against property is that they require collateral for larger amounts. On the other hand, if one has a good credit standing with the lender, he may apply for an unsecured loan and get better terms. However, there is a danger that borrowers lose their house or property if they cannot repay the debt.
Last but not least, another type of loan is the secured credit. These loans are granted when a borrower’s credit history is less than perfect. A secured credit refers to a loan where the lender requires the borrower’s signature as security for the loan amount. As a result, lenders assess the credit history of the borrower and determine the interest rate.