Understanding loans and their types

What is a loan?

A loan is the lending of money from one individual, organization or entity to another individual, organization or entity.

Loans are financial contracts between two or more parties based on mutual consent. It is given to meet the specific needs of borrowers and can be given by an individual or a group of individuals, companies, corporations, banks, financial institutions or government bodies. When the loan amount is given it becomes a liability for the lender but an asset for the borrower. Generally, interest is paid on the loan amount. While there are many different types of loans like the gold loan or regular personal loans the fundamental principle behind the way the loan functions remains the same. For instance in both cases interests are charged but the difference is that if for instance if you bought the gold that you keep as collateral at a lower gold price in Ajmer or any other place, the interest rates may not seem too high to you, however with regular loans there is no such factor at play. Check out this page for more info.

Loans can be borrowed for any purpose like purchasing any asset, personal use, medical treatment etc. The terms and conditions of loans are decided by the lender and borrower.

Bank loans are of two types

Secured Loan

These loans require collateral, which is known as security. The borrower has to mortgage assets to the bank. The asset becomes the property of the bank until the loan amount is repaid in full. On defaulting on payments, the bank can seize that asset and sell it to recover its money.

Because of this security, these loans have a relatively lower rate of interest. If you have a good credit score and a decent CIBIL score, you can easily avail a secured loan at a low rate of interest and for a longer duration.

Types of Secured Loans

• Home Loan – A home loan is a loan that is taken to purchase a property. The property for which you take out the loan acts as the collateral. Home loans are usually offered at lower than average interest rates.
• Loan Against Properties – This type of loan is also known as a mortgage and allows you to borrow against the value of a property. There are two types of loans, one that requires you to mortgage the property you already own or another that requires you to mortgage the property you plan to purchase with the help of a loan.
• Secured Line of Credit: This type of loan, while reserved for those with lower credit scores, it’s also why they would consider it as you will have a lower interest rate, and at times they have longer repayment terms. Even when you may have to put valuable assets as collateral, a secured business line of credit can have its advantages in some cases.
• Loans Against Insurance Policies – You can borrow money against your life insurance policies or endowment plans. The amount lies between 75% and 90% of the total surrender value depending on whether you have paid all premiums or not, and what type of policy it is. These loans can be used for any purpose but they must be repaid within 3 years and if not paid back within this time, the policy is terminated.
•    Gold Loan: These are also secured loans where you have to keep the gold you own as collateral. The value of collateral is determined based on the current gold rate in Aligarh or wherever you live.

• Unsecured Loan

Unsecured loans are available to meet short-term and longer-term needs. The loan is based on your past associations, credit score and history. It is not secured against an asset, so no collateral is required.

There is a higher rate of interest with an unsecured loan than with a secured loan because the lender is taking more of a risk. However, many lenders will offer fixed interest rates to keep repayments predictable and make it easier for you to fit the loan into your budget.

Types of unsecured loans include:

• personal loan

A personal loan is a financial instrument that allows you to borrow a certain amount of money from a lender and pay it back over a set period.

• short term business loans

A short-term loan is an unsecured loan with a repayment schedule of one year or less. In other words, the loan doesn’t require collateral and must be repaid within 12 months.

• Flexi loans

Flexi loans are available for customers who have availed of a loan from the bank in the past and have maintained their accounts.

• education loans

An education loan is a sum of money borrowed by students for their educational expenses. Loan amounts are based on expected family contribution (EFC), cost of attendance (COA) at the college or university where the student plans to enrol, and the student’s academic record.

• vehicle loans

A vehicle loan is financing that you obtain to buy a car, truck, van, motorcycle or another vehicle. These loans usually have terms of three years or longer.