In finance, a loan is a lending of money to one or more people, companies, institutions or other entities and the recipient pays back the money as well as for the interest on that loan. The loan itself is generally secured by a property such as a home or car. The recipient is then responsible to repay the principal amount borrowed and to also repay interest on this loan until it is paid off. It may be secured or unsecured. Loans in the financial world can either be made with collateral (which could be anything like a home or car) or without collateral (which can be nothing).
There are two types of loan that are most common. The first is a term loan, where as the second is a revolving loan. In the term loan, the principal amount is not repaid for a fixed term. With this type of loan, the lender would extend the loan term until the loan matures. This way the borrower saves interest on the interest that is paid while the loan is being done.
Federal loans are the biggest variety of loans available. They are offered by all the large banks as well as other lending institutions. Federal loans are made on the basis of financial situation of the borrower and security of collateral. The government will evaluate the borrower’s credit history and determine what his/her future financial situation will be. Based on this evaluation, they loan a certain amount of money. It is really a gift from our government to our citizens so that they can make their own decisions concerning education, housing and so on.
If you don’t have any collateral, the lender will consider other sources to borrow the money such as your credit cards. These can be a risky business, as the interest rates are high. Lenders are always on the lookout for high risk borrowers. Credit cards give the lender a chance to check your spending habits and if they see you are buying stuff that you can’t afford, then they will probably be repossessing some of your things and will charge you with very high interest rates.
Federal loans come in two types: subsidized and unsubsidized. Subsidized loans are for people who have excellent financial situation; they have the capacity to pay the monthly payment without any difficulty. They may also get a tax break through the tax year in which they received the loan. The borrower is also guaranteed a fixed interest rate during the duration of the loan.
Unsubsidized loans are for individuals or families who do not have an excellent financial situation. They are normally given by private lenders. Loans taken with unsubsidized rates are normally for students who are still going through college or for people who are unemployed. The main reason for the lender offering a lower interest rate on an unsubsidized loan is so that they will make more money from the interest sales. Although they can charge higher interest rates, there is no need to do so because the borrowers will pay the interest on time as usual. Instead of receiving a lump sum amount, they will have to pay regular monthly payments.
It is easier to get approved for a loan when you offer some form of collateral. Collateral is any valuable asset that you offer that will secure the loan. This asset is kept as security until you repay the loan. For example, you can offer your house as collateral and you can borrow a larger amount of money than usual. If you fail to repay it, the lender has the right to take your house away from you and sell it to get back the money that he lent.
People who are planning to buy a house but do not have good credit history can still apply for loans. You can use secured loans to improve your credit ratings so that you can be eligible for unsecured loans later on. Secured loans come with a higher interest rate than unsecured loans, but you do not have to worry about your home getting sold away if you cannot meet the repayment.