What are LOANS?

Today, we all are aware about what are loans ? From where they can be raised and the purposes behind raising them. So, let’s give a look to loans understanding them in detail.

WHAT IS A LOAN ?

A loan in simple words is a debt borrowed by someone from a financial firm, bank or other personal resources for various reasons starting from personal expense to business expansion. Many large companies raises loans for funds to expand a product line or further overseas expansion in order to higher profits but they also have to repay a large amount in the form of principal and interest.

In technical terms, a Loan is a debt borrowed by an entity from the other, by a person from other in order to fulfill their personal or commercial desires. They took the risk of a loan in the hope that they will earn enough profit to cover the loan as well as interest associated with the loan amount.

Whereas, a common person take loan to fulfill his/her wish like purchasing luxurious assets, gadgets, vehicles etc. That will be considered as a personal loan with different terms and conditions alike the commercial loans.

BROAD TYPES OF LOANS:

1) UNSECURED LOANS: As the name suggest unsecured loans are that type of loans in which the borrower doesn’t mortgage any of his/her properties. That means this type of loan is very insecure for the lender as he do not have anything to cover his loan if the situation occurs when borrower fails to repay. In these type of loans the interest rate is very high. Some examples are- credit card debt, overdraft etc. These are simple unsecured loans for lender.

2) SECURED LOANS: It is just the opposite of the unsecured loans. In secured loans the borrower pledges his assets against the loan that is why it is secured investment for lender as he can recover his money by auctioning the assets, bid starting from the loan amount. Examples- loan against property, car loan in which the purchased car is the mortgaged asset itself and belongs to lender until full repayment is done.

3) DEMAND LOANS: These are special kind of loans in which the borrower needs to repay the amount as soon as the lender calls for repayment. these are short term loans and do not have a fixed date of repayment. They can be secured or unsecured.

4) OTHER LOANS: Some loans are designed to increase the borrowing capacity of population or to provide them with enough funds to carry on their lives smoothly for a period of time until the economy balances. In these type of loans the interest rate is very low or almost negligible in order to help people especially known as ” subsidized loans “.

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