What is loan,its type, know in very simple words

Loan

Table of Contents

What is Loan?

A loan is a type of financial agreement where a lender agrees to give a certain amount of money to borrower and borrower agrees to pay back over time, with interest. The borrower can use loan amount for any purpose they choose, and they are expected to repay the loan in installments, over the several months or years. The lender charges interest on the loan to compensate for the risk of lending money and for the opportunity cost of not being able to use that money for other purposes.

Common classification of loans

Classification of loan are mainly two types

Secured loans

These loans require the borrower to put up collateral, such as a house or a car, to secure the loan. If the borrower defaults on the loan, the lender can seize the collateral to repay the debt.

Unsecured loans

These loans do not require any collateral and are based on the borrower’s creditworthiness. Examples include personal loans and credit card loans.

Open-End Loans

Credit card is the best example of Open End Loans where user free to lend and free to pay.user can utilize there limit once or in segments this is called Open End Loans.

Closed-End Loans

The Closed End Loans are totally different from Open End Loans because in Closed End Loans borrower can’t lend money again until they have done whole payment of lending. the best example of Closed End Loans are Auto loans, Student loans.

Conventional Loans

The Federal Housing Administration (FHA) and the Department of Veterans Affairs do not insure or guarantee conventional loans, which are a form of mortgage loan (VA). Private lenders including banks, credit unions, and mortgage firms provide them, and they normally demand for a down payment of at least 3% of the purchase price.

Who gives you loan?

There are several institutions that can offer loans.

Banks

Savings and commercial banks provide a range of loans, such as home loans, business loans, and personal loans.

Online lenders

Online lenders accept loan applications and make loan decisions totally online. Loans are offered through their websites. Paytm is the best example of Online lending.

Peer-to-peer lending

Lot of peoples who who want to instant loan they didn’t want any verification process. so in this case people choose this peer to peer lending. In this online lifestyle time Peer to peer lending also existed.

Non-bank financial institutions

These organisation’s, like finance firms, provide loans to both people and companies. Example of this type of institution insurance firms, venture capitalists, currency exchanges.

Government Organisations

A few government organisations, including the Small Business Administration (SBA), provide loans to small companies and peoples. example for these type of loan is MSME schemes, Mudra schemes etc.

Type of loan.?

Currently, the following sorts of loans are offered by institutions.:

Personal Loans
Home Loans
Auto Loans
Student Loans
Payday Loans
Small Business Loans
Installment Loans
Line of Credit
Mortgage Loans
Secured Loans (against collateral)
Unsecured Loans (without collateral)
Peer-to-Peer (P2P) Loans
Microfinance Loans
Consumer Durable Loans.

How you can apply for Loan.?

First of all you have to decide, what type of loan you want like personal loan, mortgage, auto loan, etc. then after check your credit score because present time your credit score play a very important role for loan approval. so if your credit score meet the lender’s requirements. If everything ok from your side before apply for loan you should compare loan offers from different lenders to find the best interest rate, terms and fees. then select best of them. after selection of lender gather the required documentation which is ID, proof of income, bank statements, etc. submit your loan application to the lender, either online or in person. then wait for the lender’s decision.

Things remember before taking a loan.

Purpose: Determine why you need the loan and how it will help you achieve your financial goals.
Repayment terms: Carefully review the loan terms, including interest rate, repayment period, and any penalties for early repayment.
Affordability: Make sure you can afford the loan repayments and still have enough money for other expenses.
Collateral: If you are taking a secured loan, consider the value of the collateral you are offering and whether it’s worth the loan amount.
Credit Score: Your credit score can affect the loan terms, so make sure to check your credit report and improve your credit score if necessary.
Lender: Choose a reputable lender and read the loan agreement carefully to ensure you understand all the terms and conditions.
Alternatives: Consider alternative options such as borrowing from family or friends, or reducing expenses before taking a loan.
Hidden costs: Be aware of any hidden fees such as prepayment penalties, origination fees, or late payment fees.

Loan is a serious financial commitment and it’s important to think carefully before applying for it.

Main components of Loan?

Principal: The amount of money being borrowed.
Interest: The cost of borrowing money, expressed as a percentage of the loan amount and paid over a specific period of time.
Repayment Period: The length of time over which the loan will be repaid, typically measured in months or years.
Repayment Schedule: A schedule of payments showing the amount and due date of each payment.
Interest Rate: The percentage rate at which the interest will be charged on the loan.it can be fix for starting 2-3 years or can be depend on the Bank rate of the country, according to monetary policy..
Compound Interest: Interest charged on both the principal and any accumulated interest from previous periods.
Principal and Interest Payments: Payments made to repay the loan, including both the principal and interest.
Balloon Payment: A lump sum payment due at the end of the loan term, which covers the remaining balance of the loan.
Collateral: Property or assets pledged as security for the loan.

FAQ.

What do you mean by loan?

A loan is a type of financial agreement where a lender agrees to give a certain amount of money to borrower and borrower agrees to pay back over time, with interest.

What is loan and types?

A loan is a type of financial agreement where a lender agrees to give a certain amount of money to borrower and borrower agrees to pay back over time, with interest. Loan basically 5 types Secured loans, Unsecured loans, Open-End ,Closed-End Loans and conventional loans.

What is loan in one sentence?

A loan is a sum of money borrowed by an individual or organization that is expected to be repaid with interest.