In financial terms a loan is an advanced loan, also called a credit loan or a loan, that is taken by a lender or a financial institution for the purpose of facilitating cash advances. A loan can be taken out to buy a new car, to renovate your home, or even to take a holiday. In finance, a loan is actually the lending of currency by one or more persons, companies, or organizations to others, companies etc. The borrower is then liable to repay the amount borrowed plus the interest on that loan until it is fully repaid. In short, a loan is a method of borrowing money to meet one or more of your needs.
The borrower must have a credit standing in the eyes of the lender. This means that the borrower should have an adequate source of income such as salary, bank account or other savings, and a convincing history of paying his or her debts in the past. The loan-seeker then goes through the process of getting a loan. The loan-seeker generally first has to submit an application to a lender. He or she will be required to furnish all the necessary documents to the lender, so that the lender can assess his or her creditworthiness.
The types of loans are: unsecured loan, secured loan, credit card loan, student loan, personal loan, mortgage loan and payday loan. For an unsecured loan, the borrower gives his or her property, like a home or a car, as collateral with the lender, so that if the borrower defaults on the loan, the lender has the right to take possession of the said property. The interest rate applicable for an unsecured loan will be a little higher than that of a secured loan. This is because of the absence of collateral.
The terms of repayment for any loan are decided in advance. There are some common terms that are applicable for all kinds of loans. First, the loan principal amount plus interest are determined. This is the loan principal amount which the borrower must pay to another party in exchange for repayment of the loan. The term ‘per annum’ refers to the period of time for which the loan is taken. It also indicates the repayment date which is normally paid in about thirty days.
Another important term is the term loan. It means that the borrower can borrow money from the lender only once. While it is common for people to take short-term loans, revolving loan can be used for long-term purposes. A revolving loan can be used to buy raw material or machinery, to provide monetary compensation to workers, and settle certain debts.
As these loans allow people to borrow at very low rates of interest, they can be easily affordable by most people. Besides, there are no compulsions which make them unaccomplishable. They do not even make an embarrassing situation for the borrower. Most importantly, the fact that they can be repaid back easily makes these loans work out better for the lenders than any other kind of loans.
Debt consolidation loans allow the borrowers to combine the various loans into a single debt. This way, all the debts which were previously incurred can be consolidated into one loan term. However, this option does not solve the problem of high interest. It is high interest which is still charged on the existing debts.
In case if a person wants to manage his finance charges efficiently so that he does not have to pay back a large amount in one go, he can also go for installment scheme. With the help of an installment plan, the borrower can borrow money at a low rate of interest and then repay them over a specified period of time. If the borrower chooses to repay back the amount in small instalments, then he will have to pay very less finance charges.