Basic Guide to Different Types of Loans

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Let us first see what a loan is.In simple terms loan is an agreement of understanding in which a person, an institution or an entity lends something of monetary value (money, property etc) to the borrower with an undertaking that the monetary object will be returned within a stipulated duration of time. A loan may have terms and conditions associated to it. A loan is a debt and a liability.

Loan can also be the object lent by the lender to the borrower.

Types of Loans

There are various types of loans available to suit specific requisites. These loans are provided by banks, financial institutions, private money lenders and even friends & family. Some common requirements could be for setting up of a business unit, purchasing of property or a house, loans for buying automobiles, student loans and etc.

Short Term

Short term loans are referred so because they are meant for short duration of time, a period for 1 year or less. They are generally required for seasonal business purposes, hence are also called as seasonal loans. Some business units seek their acquirement to meet the working capital needs.

Medium Term

The duration of medium term loans ranges from 2 years to 10 years. The need for medium term loan arises to fulfill capital needs like buying of assets, and other factors of production. The need for medium term loans might differ for different organizations.

Long Term

As the name suggests, long term loans are those which are paid over a long duration of time, generally for 10 years or more. They are acquired for purchasing, land, production plants, heavy machineries etc. Long term loans require collateral security of the assets and a part of the total amount is required to be paid after a stipulated period (ex: 6 months or 1 year).

The loans can also be categorized in other categories like secured loans and unsecured loans. Let us read more about them.

Secured Loans

Secured loans are those loans which are backed by some security (generally an asset like house, property or automobile etc) offered as collateral. The purpose of submitting the security is that if one is not able to pay the amount of loan, the bank realizes the amount by selling off (or by making some other arrangement) the asset offered as security. Banks often look at the credit score while providing a secured loan, so it is imperative to showcase the positives while applying for a secured loan so that one can look forward to negotiate the interest rate too.

Secured loans are needed for the home equity, mortgage, purchasing automobiles purposes.

Unsecured loans

Unsecured loans are called so because they are not backed by any security or require no collateral. Since the person or financial institution do not hold anything as security so having an excellent credit score becomes a natural requirement for the borrower.

The rate of interest is high incase of unsecured loans but it also diverges according to ones credit history. These are also called signature loans as the only thing the lender possesses is the signature of the borrower.

Payment made by a credit card is a common example of an unsecured loan. Other examples can be student loans, lines of credit and etc.

Depending upon the need and requirement, one can decide what type of loan is best suitable. Short and medium term loans may be needed for a wide range of requisites. A long term loan may be best suitable for buying a house or purchasing land, plants and heavy machineries in case of business units. Secured and Unsecured loans play their dedicated roles and can be utilized as per the needs.

Also see:

How to get loan for bad credit


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