Loan
Money borrowed from a lender and to be returned within a stipulated period of time is called as a loan. The money borrowed is called as the principal and the lender disburses the amount at a cost, which is called as interest. The total amount is to be paid back in installments of the same amount. Granting loans is the primary task for financial institutions.There are broadly four types of loans namely secured loan, unsecured loan, demand loan and subsidized loan.
Secured loan is given on the basis of a security where the borrower guarantees an asset as collateral. Mortgage loans for buying a house and car loans are the main types of examples for secured loans. For mortgage loans the borrower offers a security, lien on the title to the house till the time the loan is not repaid in full. In case of any default on a mortgage loan, the financial institution has full legal authority to take possession of the house and sell it to recover the loan amount. In case of secured auto loans, the loan amount is secured by the car.
Unsecured loans are provided by financial institutions on the basis of the credit history of the borrower. There is no security involved in issuing of an unsecured loan. Personal loans, credit card debt loans and bank overdrafts are the most common types of unsecured loans. The interest rate charged on unsecured loans is rationally more than that charged on secured loans.
Another type of loan is the demand loan, which is a short term loan typically given out for not more than 180 days. This type of loan can be secured or unsecured and do not have any specified repayment date or period. The lender can demand for repayment at any time. Demand loans carry floating interest rates, which are variable depending on the prime rate.
Subsidized loans offer interest rates which are reduced by a subsidy. Education loans are often subsidized loans in which interest rate is not charged for the period while the student is enrolled in education. Other loans that do not charge interest or charge low interest rates are also categorized as subsidized loans.
A loan that is paid back in regular installments is called as an amortized loan. Each installment is divided into two portions, one which is paid towards reducing the principal amount and the other aimed to pay the interest applied on the loan. With time each installment allocates a larger portion towards paying of the principal and a smaller portion towards paying the interest. In case the loan has been given on a fixed interest rate, each installment will be of the same amount throughout the loan tenure.
The interest rates charged on loans are generally calculated based on the annual price that is charged to a specific principal amount. The interest rates charged on loans can also be categorized into different types.
1. Simple interest rate is the most basic type of interest rate that is applied only to the borrowed amount. It is usually used for loans that are payable within a year of borrowing.
2. Compound internet rate is calculated for each period of time on the original principal and the accumulated interests from past periods. This type of interest can be specified as a yearly rate; however the compounding durations can be annual, semi-annual, quarterly, or continuously.
3. Floating interest rate is also called as variable or adjustable interest rate that varies according to the market trend.
Choose your loan carefully after understanding all the terms and conditions.