Define Loan –
A loan is a term used for the money that one or more individuals or the companies borrow from banks or other financial institutions for their financial needs. Bank or other financial institutions lend them money for some interest for the agreed duration of time. The borrower has to make monthly payments to these banks or financial institutions based on the rate of interest and the amount of money that they had borrowed from these banks or financial institution.
There are different types of loans. Mainly the loans are classified into secured and unsecured, open end and closed end and conventional types.
In secured loan, the borrower has to put some asset as collateral. Most financial organization would ask borrowers to present deeds or other documents showing their ownership of the asset, until the full payment of the loan is done. The commonly put assets are house, bonds, car and stocks etc. People tend to apply for secured loans when they want to borrow large amount of money. Lenders mostly are not willing to give large amounts of money without any collateral and hence they hold the borrower assets as a form of guarantee. Secured loans come with low interest rate, long repayment period and stricter borrowing limit. Mortgage loan, auto loan and boat loan are all examples of secured loan.
In unsecured loan, the borrower does not have to give any asset as collateral. In this lenders offer loan to borrower after assessing their financial status. Post that only they estimate the borrower’s capacity for repayment. Education loan, personal loans, credit card purchases are all examples of unsecured loans. These come with high interest rates.
In open end loan, the borrower has the freedom to borrow over and over. Credit cards and line of credit are some examples. But these come with credit restriction. Credit limit basically denotes the maximum amount of money which the borrower can borrow. Depending on their financial needs, an individual has the choice to use all or just use a portion of this limit. Whatever amount they use will decreased from the credit limit.
In closed end loans, borrowers are not allowed to borrow again until they have paid their previous loan. As the borrower makes the payment for the closed end loan, the loan balance would decrease. If the borrower is wanting to have more money, then they need to apply or another loan. Mortgage loans, student loan and auto loan are some examples.
Conventional loan is the term used when apply for mortgage. In this case the loan is not insured by government agencies such as RHS.