Paying upfront for high value assets can be difficult but with the availability of loans, one can buy expensive assets, paying for them over time. This is attained by securing a loan. A loan benefits the person taking the loan, or the borrower and the person or organization giving the loan or the lender.
In a typical loan, the borrower receives certain amount of money from the lender and is obligated to return the amount, over a certain period of time. Some profit for the lender is worked into the equation, which works out as a rate of interest. This ascertains some amount, over and above the borrowed sum, will have to be paid to the lender as the cost of providing the loan. The three factors building a loan are:
• The principle or the amount for which the loan is given or taken
• The time period that the loan is given for
• The rate of interest at which the money will have to be paid back
Loans are usually paid in monthly installments of money, including amount due in interest. In a progressive economy, financial organizations come into being for the purpose of providing loans in the market. They make a business out of it, answering the need of the borrower and making profit for themselves at the same time.
There are two broad categories of loans- Secured and non-secured.
A secured loan is one that has collateral against it, which allows the lender a security, if the loan is defaulted. This type of loan is often attained as a Mortgage loan, when typically purchasing real estate. This kind of loan is most popular in buying personal housing. The lender makes available the initial amount to be paid to the borrower for buying the land or the property. This amount is to be repaid by the borrower over a certain period of time. The security on the loan is that if the mortgage is not paid in whole, the lender or the bank providing the mortgage loan can claim the property and retrieve its money.
A similar loan can be taken out while purchasing other assets like a car. This is a shorter loan, corresponding to the workable life-span of the car model. This can be directly granted to the buyer of the car or a car dealer can work this loan through as a middleman.
A non secured loan is one that does not have a collateral security given by the borrower. These loans given out by financial organizations may come with different interest rates, as per the profile of the borrower and the lender. Some non-secured loans are credit card accounts, bank overdrafts, personal loans, line of credit and corporate bonds.
While procuring a loan is easy, one has to be careful of being duped by unscrupulous lending practices and organizations. Sometimes lenders provide loans to the borrowers, with the intention of putting them at a situation where they can be taken advantage of. A big sum of money is offered as a loan, which acts as a bait to the borrower. What he does not realize is that inability to pay the loan back in time, with interest, can severely compromise his financial situation and will surely result in huge losses. It is of extreme importance to procure loans from authorized organizations. Many organizations tend to charge exorbitant interest rates and work in inevitable extras in the total amount to be paid. Most accused in these charges are various credit card companies which lure in customers with the promise of available buying capacity but hide their irrational profits in the bargain.
Loans make our life easier, but to maintain caution in procuring loans, like in all financial transactions, is necessary.