Loan: Meaning and types of loans

When it comes to managing our finances, loans play a significant role in providing individuals and businesses with the necessary capital to meet various financial needs. Whether you’re planning to buy a house, start a business, or fund your education, loans can be valuable tools. In this article, we’ll delve into the meaning of loans and explore the different types available.

What is a Loan?

A loan is essentially a sum of money borrowed from a lender, which is typically a financial institution, such as a bank or credit union, or even an individual. The borrower agrees to repay the borrowed amount along with interest over a specified period. Loans are a crucial part of the modern financial system and serve as a means for individuals and businesses to access funds that they might not have readily available.

Reasons for availing of a loan

A borrower might also opt for a mortgage for a number of motives, including:

  • Purchasing a belongings, vehicle or any item
  • Investment or an enterprise project
  • Funding education of kids
  • Debt consolidation
  • Manage personal expenses, such as a wedding, vacation, renovation, and so forth

Also Read: What is Net Present Value?

Classification of loans

Loans are widely classified into the subsequent categories based on the cause they’re availed for:

  • Secured Loans: In these types of loans, the borrower presents an asset as collateral or security against which he receives the mortgage. In the occasion the borrower fails to repay the mortgage, the lender has some means to retrieve cash. Secured loans tend to have decreased hobby quotes than the alternative kind of mortgage, referred to as unsecured loans, as there’s a lower chance of creditors.
  • Unsecured loans: These types of loans are offered to the borrower primarily based on their past affiliation and credit history, with no collateral. However, those loans have a better interest charge. Borrowers with excessive credit score ratings discover it smooth to avail of unsecured loans.

Types of secured loans

  • Gold loan

Gold has been a preferred asset for elegance. One can obtain a loan by means of pledging gold embellishes or cash as collateral. These are typically quick-time period loans and have a brief reimbursement length. The quantity of mortgage sanctioned is a particular percentage of the gold’s value pledged.

  • Home loan

Home loans are secured loans and the most popular way of financing a residence buy or creation. Some of the commonplace types of domestic loans are:

  1. Top-up mortgage as additional loan for upkeep or improvement of new residence
  2. Home construction loan for building a house
  3. Land purchase loan for purchasing a chunk of land, constructing a domestic
  4. Home mortgage stability transfer of existing domestic loan
  • Loan against fixed deposits

A borrower also can avail a mortgage of as much as 70%-90% of their fixed deposit’s value. However, this will range from lender to lender. Moreover, the mortgage tenure is normally the same as the FD tenure because it can’t exceed the FD’s tenure.

  • Loan against property (LAP)

In this sort of secured mortgage, a borrower can pledge a residential, business or business property to acquire a mortgage. The quantity of loan distributed is equivalent to a specific percentage of the belongings fee. This percentage will depend upon the lender and range from 50-60% to 80%. A Loan Against Property can be availed if one has a completely built residential or commercial property without any different encumbrances. It is also useful for those trying to finance higher education desires for children, marriage, and so on. Companies avail such loans for commercial enterprise growth, product development, and so on.

  • Loan against insurance policies

Loan against insurance policies is a financial solution that allows policyholders to access funds by using their insurance policies as collateral.

Also See: What is hypothecation? What is its applicability?

Types of unsecured loans

  • Flexi loan

A flexi loan enables a borrower to avail budget from his authorised limit and withdraw the amount while required. They must pay hobby only on the amount used and as EMIs. One can withdraw his mortgage, restrict any variety of instances, and prepay when there may be additional coins without any additional cost.

  • Personal loan

A personal loan allows a borrower to get immediate liquidity. As it’s far an unsecured loan, the interest prices are higher. The lender presents the loan by way of considering factors inclusive of employment history, career, credit score history, income degree, repayment potential, and so forth. It is also called a multipurpose loan as it can be used for assembly fees, including a new commercial enterprise undertaking, infant’s schooling, consolidating all money owed in an unmarried mortgage, domestic preservation, and so on.

  • Short-time period commercial enterprise loan

These forms of loans include one-of-a-kind sorts of financing via lenders to corporations for a whole lot of purposes. It helps a commercial enterprise meet its urgent or short-time period enterprise wishes, consisting of running capital desires, enterprise growth, enterprise acquisitions, renovations, handling coins glide, masking operational charges, etc.

How does the loan process work?

When a character or business is in want of money, they will method a bank or non-banking financial employer (NBFC) for a mortgage.

Before applying for a mortgage, it’s miles essential to determine the type of mortgage based totally on their necessities and verify the amount. Similarly, one has to understand if they may be eligible for the loan. For this, one can use online tools, consisting of a non-public mortgage eligibility calculator, to find out the quantity they could borrow.
During the mortgage utility method, the borrower must offer info, inclusive of name, contact facts, employment type, etc., along with assisting documentation. They need to specify the kind of loan and the amount they are looking for.

The lender will evaluate the application and approve or sanction the loan. If the mortgage utility gets rejected, the lender needs to specify the purpose. In case the application is accredited, a settlement is signed between the lender and the borrower. The lender transfers the loan amount to the borrower’s account. The agreement needs to specify the terms of the mortgage agreed upon by the two parties.

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