Imagine, you have in mind a solid business plan. You have drawn out the roadmap and all the strategies necessary to make it a success, the only thing left for you to secure is the funding.
Or, maybe you want to pursue higher studies abroad. This involves quite a lot of expenditure. Perhaps you want to build the home of your dreams or buy that shiny car that you saw in the showroom the other day. And you need a substantial amount of money to fulfill all of these wishes.
In all of these cases, you have a simple solution. When you want to borrow money, the best way to proceed is to apply for a loan.
First, you need to compare the interest rates, loan amounts, and terms and conditions of a loan before applying for one. This blog explains the various types of loans available and how they work based on your requirements.
First of all, let us try to understand what defines the term loan in a corporate world.
What is a loan?
A loan is a quantity of the money borrowed from a bank or other financial institution by one or more persons or businesses to finance scheduled or unanticipated occurrences. The borrower thereby incurs a debt, which he must repay with interest and within a specified time frame.
Before any money crosses hands, the beneficiary and the lender must agree on the terms of the loan. In some situations, the lender will compel the borrower to put up an asset as collateral, as specified in the loan agreement.
For instance, a mortgage is a popular type of loan taken out by American households to finance the purchase of a home.
Individuals, corporations, and governments can all receive loans. The main purpose of taking one out is to obtain dollars in order to increase one's overall money supply. For the lender, interest and fees are sources of income.
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Different Types of Loans
There are various kinds of loans available, but they all are classified on the basis of three categories as explained by the source;
On the basis of Security provided
On the basis of Purpose
On the basis of assets pledged
A) Loans On the Basis of Security Provided
There are two types of loans on the basis of purpose. They are:
These loans demand the borrower to put up collateral in exchange for the funds. If the borrower is unable to repay the loan, the bank maintains the right to pursue the delayed payment using the pledged collateral.
When compared to unsecured loans, the interest rate on these loans is significantly lower.
Unsecured loans are ones that don't require any form of collateral in order to be disbursed. The bank considers the borrower's previous relationships, credit scores, and other variables while deciding whether or not to provide the loan.
Because there is no means to recoup the loan amount if the borrower defaults, the interest rate on such loans may be higher.
To know more about secured and unsecured loans, click here.
B) Loans on the Basis of Purpose
There are four types of loans on the basis of purpose:
Education loans are financial tools that help borrowers further their education.
An undergraduate degree, a postgraduate degree, or any other diploma/certification course from a reputable institution/university can be used as the basis for the course.
To be eligible for funding, you must have the institution's admission permit. Both domestic and international courses are eligible for funding.
Education loans are provided for the purpose of acquiring an academic degree at a recognized institution or university. Government and private-sector credit sources are both available for education loans.
Federal loans usually have lower interest rates, and some even include interest that is subsidized. The application process for private-sector loans is more traditional, and the interest rates are often higher than those for federal government loans.
Personal loans are unsecured loans offered by financial institutions and are based on factors such as employment history, repayment capacity, income level, profession, and credit history.
A personal loan, also known as a consumer loan, is a multi-purpose loan that can be used to cover a variety of urgent requirements.
Unlike other sorts of loans, such as a home loan or a gold loan, which require more papers, Personal Loans only require a few and the approval procedure is rapid.
Personal Loan online services are available from a variety of financial institutions, and the loan amount is disbursed within a few hours if the lender is confident in your ability to repay the loan.
Loan for a Vehicle
Vehicle loans are used to fund the purchase of two-wheelers and four-wheelers. In addition, the four-wheeled vehicle can be new or secondhand. The loan amount will be set by the lender based on the vehicle's on-road price.
Because the loan rarely gives 100 percent financing, you may need to be prepared with a downpayment to purchase the vehicle. Until the loan is paid in full, the lender will own the vehicle.
Home loans are used to finance the purchase of a house/flat, the construction of a house, the renovation/repair of an existing house, or the purchase of a plot for the construction of a house/flat.
The property will be retained by the lender in this situation, and ownership will be given to the legal owner once the repayments are completed.
(Recommended reading: What are Flash Loans in Decentralized Finance?)
C) On the Basis of Assets Pledged
People pledge their assets before applying for these types of loans. These types of loans are of two types. They are:
When a borrower pledges physical gold, such as jewelry or gold bars/coins, many financiers and lenders offer cash.
The lender weighs the gold and determines the amount offered based on multiple purity checks and other factors. The money can be used for whatever you like.
The loan must be repaid in monthly installments in order for the loan to be cleared before the end of the term and the gold to be returned to the borrower's possession.
If the borrower does not make timely payments, the lender has the right to seize the gold in order to recoup its losses.
Individuals and businesses borrow money by pledging property, insurance policies, FD certificates, mutual funds, shares, stocks, bonds, and other assets, similar to pledging gold. The lender will give a loan with some margin based on the value of the pledged assets.
The borrower must make timely payments in order to retain possession of the pledged assets at the conclusion of the term. If the borrower fails to do so, the lender may liquidate the assets to recoup the money owed.
Nowadays loans prove to be really beneficial in some stages of life. For people applying for a loan, it is advised to maintain a good credit score.
The lender's decision on whether to proceed with your application or reject it from the outset is mostly based on your credit score. When it comes to unsecured loans, this is especially true.
These were the different types of loans available in the financial world at this point. Hope this helps the next time you decide to borrow money from a bank. Till then, Good luck!
(Also read: What is Credit Risk?)