Loans – Meaning, How They Work, Types, and Features
We might not always have the cash we require to try to to certain things or to shop for certain things. In such situations, individuals and businesses/firms/institutions choose the choice of borrowing money from lenders.
When a lender gives money to a private or entity with a particular guarantee or supported trust that the recipient will repay the borrowed money with certain added benefits, such as an rate of interest , the method is named lending or taking a loan.
A loan has three components – principal or the borrowed amount, rate of interest and tenure or duration that the loan is availed.
Most folks prefer borrowing money from a bank or a trusted non-banking financing company (NBFC) as they're sure to the govt policies and are trustworthy. Lending is one among the first financial products of any bank or NBFC (Non-Banking Financial Company) offers.
Types of Loans
Based on the Security Provided
Secured Loans
These loans require the borrower to pledge collateral for the cash being borrowed. In case the borrower is unable to repay the loan, the bank reserves the proper to utilise the pledged collateral to recover the pending payment. The rate of interest for such loans is far lower as compared to unsecured loans.
Unsecured Loans
Unsecured loans are people who don't require any collateral for loan disbursement. The bank analyses the past relationship with the borrower, the credit score, and other factors to work out whether the loan should tend or not. The rate of interest for such loans are often higher as there's no thanks to recover the loan amount if the borrower defaults.
Based on the Purpose
Education Loan
Education loans are financing instruments that aid the borrower pursue education. The course can either be an undergraduate degree, a postgraduate degree, or the other diploma/certification course from a reputed institution/university. You must have the admission pass provided by the institution to urge the financing. The financing is out there both for domestic and international courses.
Personal Loan
Whenever there's a liquidity issue, you'll choose a private loan. The purpose of taking a private loan are often anything from repaying an old debt, happening vacation, funding for the downpayment of a house/car, and medical emergency to purchasing big-ticket furniture or gadgets. Personal loans are offered supported the applicant’s past relationship with the lender and credit score.
Vehicle Loan
Vehicle loans finance the acquisition of two-wheeler and four-wheeler vehicles. Further, the four-wheeled vehicle are often a replacement one or a second hand one. Based on the on-road price of the vehicle, the loan amount are going to be determined by the lender. You may have to get ready with a downpayment to get the vehicle as the loan rarely provides 100% financing. The vehicle are going to be owned by the lender until full repayment is formed .
Home Loan
Home loans are dedicated to receiving funds so as to get a house/flat, construct a house, renovate/repair an existing house, or purchase a plot for the development of a house/flats. In this case, the property are going to be held by the lender and therefore the ownership are going to be transferred to the rightful owner upon completion of repayments.
Based on the Pledged Assets
Gold Loan
Many financiers and lenders offer cash when the borrower pledges physical gold, may it's jewellery or gold bars/coins. The lender weighs the gold and calculates the quantity offered supported several checks of purity and other things. The money are often utilised for any purpose.
The loan must be repaid in monthly instalments therefore the loan are often cleared by the top of the tenure and therefore the gold are often taken back to custody by the borrower. If the borrower fails to form the repayments on time, the lender reserves the proper to require over the gold to recover the losses.
Loan Against Assets
Similar to pledging gold, individuals and businesses pledge property, insurance policies, FD certificates, mutual funds, shares, bonds, and other assets so as to borrow money. Based on the worth of the pledged assets, the lender will offer a loan with some margin at hand.
The borrower must make repayments on time in order that he/she can get custody of the pledged assets at the top of the tenure. Failing to try to to so, the lender can sell the assets to recover the defaulted money.