hello friends, today we will know What is a Loan. The world of finance is based on loans because loans help people to buy a house, start a new business or fulfil various financial needs. In order to make an informed financial decision it is very important for us to understand what a loan is and what types of loans there are.
This blog will explain the basic things about loans to you, it will give you information about how many types of loans there are and what kind they are. After reading this blog you will get basic information about loans which will help you in selecting a proper loan.
So let’s explore
What Is a Loan?
Loan means borrowing money by making an agreement with someone and returning that money on some specific terms and conditions. While returning the loan, we have to pay interest on it which is written in the agreement. There are 2 types of such loans, either secured loans or unsecured loans.
1. Loan with security (Secured Loans)
A loan with security means a loan that has some collateral security. In such a loan, the lender takes a house or land, car or fixed deposit for security in the form of a mortgage or property.
If the borrower does not repay the loan on time, the loan provider will sell the collateral security and repay the loan amount from it.
A common example of a secured loan is a home loan, auto loan and overdraft loan.
2 Loan Without Security (Unsecured Loan)
A loan without security means a loan in which the borrower does not have to provide collateral security such as a house, car and fixed deposit.
This loan is given to the borrower on the basis of the creditworthiness of the borrower it means if the borrower has a good credit score with a good financial history and also has sufficient repayment capacity to repay the loan then this loan can be given to him.
The interest rate in an unsecured loan is higher than that in a secured loan because there is no collateral security in it. To compensate for this risk the internet rate is high.
Personal loans and credit cards are examples of unsecured loans that are given without security. In a personal loan, the borrower gets a lump sum amount from the lender which he has to repay within a particular time period.
Overall, in an unsecured loan, the borrower does not need to provide any kind of collateral security but in return, he has to pay high interest to the lender
What Are The Types of Loans?
Personal loans are given for personal use. It is given for various purposes. For example, by taking a personal loan you can do home improvements or renovate the kitchen and bathroom, which increases the value of your home.
By taking a personal loan you can pay your unexpected bills like medical bills or emergency car repairs. The benefit of a personal loan is that it helps you to cover major expenses at home, such as expenses incurred during marriage.
The borrower does not require any collateral security for getting this loan. good credit score and repayment capacity are enough to get this loan
2. Mortgage loans
Mortgage loans are designed to purchase real estate such as homes and land. In this loan, the loan is secured by mortgaging the property. If the borrower is unable to repay this loan, then the lender recovers the loan money by selling the mortgaged property.
An auto loan is specially designed for purchasing vehicles. In this, the borrower can purchase cars, trucks and motorcycles.
When a borrower takes an auto loan, the lender keeps the vehicle he has purchased as a collateral security for the loan.
If the borrower fails to repay the auto loan then the lender recovers his money by selling that vehicle.
Auto loans can be repaid in 36 to 72 months. The interest rate in this loan depends on the credit score of the borrower.
4. Education loans
Education loan covers the fees for pursuing higher education i.e. tuition fees, books and living expenses. Education loan is given in the joint name of the student and parent. The same simple interest rate is charged. The government returns the interest charged during the moratorium period in education loans in the form of a subsidy.
EMI of Education Lona starts 1 year after the completion of the college course. The interest rate of this loan is quite nominal and there is no processing charge in it.
5. Business Loan
Business loans have been designed to be given to special entrepreneurs and companies. A business loan is used by companies to start a new business or to expand an existing business. Using this loan the company can purchase new equipment or machinery and can also cover the operating costs of the business.
There are two types of business loans, one is secured, i.e., in which some collateral security has to be given and the other is unsecured loan, i.e., in which there is no need to give any collateral security.
6. Crop Loan
Crop loan is specially designed for farmers to cover the cost incurred in farming. By using this loan, the farmer can buy seeds as well as fertilizers, pesticides and other farming equipment. A crop loan is a short-term loan in which a hypothesis is made regarding an annual crop. Its main objective is to provide financial support to farms for crop cultivation.
How Do Loans Work?
a few steps are involved in the loan process.
1. Application:
First of all the borrower has to fill out the application form in which he has to give all the information like his financial status, credit record, and purpose of the loan.
2 Approval
The lender evaluates that information, checks the borrower’s creditworthiness, and checks his financial capacity to see if he will be able to repay the loan or not
3 Disbursement
After the loan is approved, the lender deposits the loan amount in the borrower’s account
4 Repayment
After the loan is disbursed, the borrower has to repay the loan money on time in instalments as per the loan agreement.
Conclusion
Loans are really very essential in the finance world because they help in running economies. Due to loans, people’s personal goals are fulfilled by taking personal loans, people can complete their personal work, and if someone wants to start a new business then he can start his business by taking a loan. Students can also take education to complete their higher education and can fulfil their dreams.
Whether people’s dream of buying a house or a car is fulfilled due to loans. always, it is important to do financial planning while taking a loan.
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