What is Loan and Types of Loans

Money is important to every person inasmuch as capital is important to every business to thrive. When both money and capital are inadequate or absent to a certain extent, one is left without a remedy. He can always resort to securing loans.

 

A loan is an arrangement whereby a lender or creditor gives money, property or security to a borrower or debtor and the latter agrees to return the same, usually with accrued interest, at a certain future time as agreed upon by the parties. The creditor or lender has to bear the risk of not getting paid and to endure having to spend for a collection suit. 

 

The proceeds of the loan can be used for a variety of purposes, depending on the needs of the borrowers. Loans empower the debtors the needed capital to purchase items when they do not have enough money or if they do not want to use their own money. If loans are paid on time, it will reflect on the credit history of the borrower as a positive remark and qualifies him to larger loans and with better interest offers. 

 

Most banks offer this kind of loan. The borrower is given unrestricted authority to use the proceeds of the loan into whatever needs he has to fulfill. It is also typically unsecured and without limit as to the loan amount. However, in general, lenders would require collaterals or some sort of verification.  He only disadvantage of personal loan is that interest rates are quite high compared to the other types of loans. But if you are looking for relatively small amounts of money to borrow, you should prefer personal loans. 

Credit cards are very convenient tool for a borrower because it is often accepted by a large number of merchants as a form of payment. When a consumer uses a credit card, he is actually taking out a loan. In terms of use, credit cards are flexible. Applications are also easy and fast compared to the other types of loans. However, the interest rates imposed on credit card purchases are quite higher. There is also a tendency for the borrower to go overspending on his purchases because of the convenience that credit cards provide.

Home-equity loans are resorted to by homeowners. In effect though, the homeowner is taking a loan out against the value of his residential home. The amount of the loan depends on the market value of the home. The good side of home-equity loans, however, is that interest rate is relatively lower and the number of years required for the loan to be repaid is longer. But the most attractive feature of home-equity loan is that the interest accruing on the loan is tax deductible. The only danger lies in the failure of the borrower to pay and the creditor has to foreclose the property, leaving the borrower and his family homeless. 

A mortgage is a secured loan where a collateral is required for the loan to be approved. Mortgage loans are classified into long-term or short-term. The property used to secure the loan obligation must also coincide with the loan amount. Failure to pay would result to foreclosure of the mortgage constituted on the property offered as collateral. 

Cash advances are usually short-term loans. Cash advances are not advisable for some because they are not tax deductible, impractical for many uses, mostly for large capital needs and the interest charges are quite high. They are only considered last resort loans. 

When one is starting out a business or to augment business capital, obtaining business loan is advisable. By nature, it is a fund provided to the business and has to be repaid at a certain time and with corresponding interests. The loan transaction varies from the amount of the loan, the date of payment, interest rate and the qualification of the borrowing company. 

Education is very important nowadays. Lack of funds or poverty should  not hinder one from obtaining education. A student loan is designed to help students pay for tuition fees, projects, books, and other miscellaneous expenses. The interest rate may also vary, depending on the agreement between the student lender and the lending university or benefactor. Interest rate is deferred while the student is finishing his education.

 

The about are the details about What is Loan and Types of Loans.