What Are Loans?

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The term loan is a used to refer to a debt offered to a borrower which should be repaid with an interest. Loan can refer to debts in terms of finance or assets. In this case, a focus will be shifted to loans in terms of finance advanced to borrowers by lenders.

Loans are usually associated with such terms as loan tenure, interest rate, loan principal, default, and loan arrears among others. Loan tenure, loan principal, interest rate are matters under discussion during loan application while default and loan arrears are matters associated with the loan repayment.

A loan should never be treated as income since it is not. Any borrower needs to understand that loans are advance credits that need to be paid back. This makes it important to have a good use for the loan and to ensure that one will be comfortable paying back the loan before taking it up. There are a large number of institutions and establishments that are usually ready to offer loans. These include banks, online lenders, and credit unions.

secured-loan-vs-unsecured-loan

There are mainly two types of loans offered. These are secured and unsecured loans.

Secured loans

These are forms of loans where the borrower is required to pledge one or more assets as collateral for the loan. The most common assets used in this form of loan are property and car. The most commonly known secured loan is the mortgage where the borrower is assisted by the lender to acquire property. For collateral, the lender holds on to the title of the house until the borrower pays for the loan amount used to acquire the property in full.

In cases where the borrower is unable to pay for the mortgage in full, the lender has the legal right to repossess the house and sell it to a willing party in order to recover the amount owed. Mortgage loans are usually long term loans since they are of huge sums of money. The loans usually run for several years.

Unsecured loans

unsecured-personal-loansThese are forms of debts that are not attached to the borrower’s assets. They come in very many forms and are made available by a large number of institutions. In the UK alone: banks, online establishments, and credit unions, actas lenders. Some of the unsecured loans available include credit cards, personal loans, bank overdrafts, and corporate bonds. The interest rate on unsecured loans usually varies from one lender to another. When compared to secured loans, unsecured loans have a higher interest rate attached to them. This is because of the risk associated with the loan in case a borrower defaults in paying for the loan.

Loans are designed for both personal and commercial purposes. This has led to further classification of loans as personal and commercial loans. Loans taken up for corporate bonds or to acquire commercial mortgages are usually referred to as commercial loans. Personal loans on the other hand are taken up by an individual person. They can be taken up for personal consumption or for an individual’s business development. Some of the most common personal loans available include credit cards, payday loans, mortgage loans, car loans, guarantor loans, and installment loans.

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