A loan is a service provided by various financial institutions both run by the government as well as private individuals or a corporation. It is the process of lending money given a certain rate of interest per annum that has to be paid back along with the principal amount at the end of the agreed duration.
The rate of interest differs based on which type of loan the person is choosing.
There are two types of loans that are offered:
- Secured Loan
- Unsecured loan
Secured and Unsecured loan
Secured Loan
Secured loans are loans that are given to the individual in exchange for an asset which is handed over during the duration of the loan to be paid as a collateral.
These types of loans are protected by financial assets.
These financial assets include personal property, real estate, stocks, bonds and sometimes other valuable objects such as cars, gold, gemstone and jwellery etc.
These types of loans are a customary way to borrow large amounts of money. The lender is only going to loan a large sum with the promise that it will be repaid while the debtor stakes his physical assets until the debt is repaid.
The reason why it is called a secured loan is because that borrower gives security to the lender that the amount borrowed shall be repaid.
Secured Loans can be Home equity loans are home equity loans of credit. They are based on the current value of your home subtracted by the amount that you still owe them. This loan uses your home as a collateral. Also, secured loans are not limited to new purchases.
Secured loan is that the lender can sell your collateral to pay off the loan.
Unsecured loan
Unsecured loan is the exact inverse of secured. The most popular example of a secured loan is credit cards, personal loans or student loans. In this type of loan the risk that it may not be repaid and the lenders may not be able to recover any asset in return.
Thus, the interest rates for this type of loan are usually higher than the secured loan. In case you are unable to pay your unsecured loan it is possible for you to convert it to a secured loan however you must possess some physical asset that could be staked as the collateral.
There are five C’s based on which you will be just eligible for the loan:
- Capacity- income and current debt
- Capital: money in savings or investment accounts
- Collateral: personal assets that can be offered as collateral
- Condition: terms and conditions of the contract.
- Character: This can include your credit score, employment history and other references.
People with a criminal background might have a harder time applying for such loans. For such people, the terms and conditions in the contract may also be harsher.
It is also to be understood that business loans and personal loans will have different terms and conditions. It mostly varies depending upon the type of institution that the loan is being borrowed from.
Capital is an essential part when you advent upon any new ventures. Applying for a loan is the most popular way to raise capital. However, one must move very cautiously so as to not be swamped in debt. It is important to know that signing up for a dead contract which is heavily lopsided or with shady institutions may lead to a very miserable financial future.
One must read the contract terms and conditions over and over until every line and word is understood by bhai the individual.
There are innumerable cases of arising health concerns due to stress and depression that have been stabbed from being in debt.There are many debt counselling institutions also set up to help people through these phases.
We hope that caution is exercised while taking out any type of loan.
Wish you best of luck in your financial journey!
