What is a loan and how many types are there?

what is loan

In the modern world, loan is no longer an unknown word. People choose loans for many purposes. It could be for marriage, travel, buying a house, higher education, and many other reasons. If we discuss what is a loan or what is the meaning of loan then basically, loan is an amount taken from a person or organization which we use to manage some unexpected expenses or deal with financial emergencies. When a person borrows money from a bank or any other financial institutions to meet his needs, it is called loan. The borrower has to repay the loan amount along with interest to the lender in a fixed time interval. There can be many reasons for taking a loan, such as building a house, buying a car, doing business or education etc.


Term Loan – Types of Term Loan

Term loan means a specified amount given for a fixed period usually between one to ten years and paid back with interest. Let us discuss further what are the types of personal loans. There are three main classifications in term loans: short term loans, intermediate term loans and long term loans. This classification depends on the period of time i.e. the time for which the money is lent. Short term loan can be for buying home appliances or long term loan for buying a house or intermediate term loan for buying a car.

Short Term Loan: This loan is mainly taken to meet unexpected cash shortage. The repayment period in this loan is 1 year or less than 1 year.

Medium Term Loan or Intermediate Term Loan: It is taken for a planned purpose with a tenure of 1 to 5 years.

Long term loan: A loan in which the repayment period is 3 years or more. Only secured loans have been given place in this.

Types of Loan in India

There are many different types of loans available in India, which are divided into two categories based on the purpose of the loan:

Secured Loan

Secured loans must be backed by a mortgage equal to the amount borrowed. Collateral is secured by the asset operating as a right of the lender which can be seized if the borrower fails to repay the loan. Compared to unsecured loans, these loans have lower interest rates. Secured loans are further divided into the following categories, this will give you an understanding of the different types of such loans. Such as Gold Loan, Loan Against Securities, Property Loan, Home Loan, Corporate/Business Loan.

Gold Loan

Gold has long been considered one of the most popular asset classes. For gold loan, you have to pledge gold jewelery or coins as security.

Loan Against Securities (LAS)

Loan against securities is a loan in which you pledge your shares, mutual funds or life insurance policies as collateral to the bank against your loan amount. Loan against securities is usually offered as an overdraft facility in your account after you have deposited your securities.

Loan Against Property (LAP)

One of the most common types of secured loans is the loan against property. To obtain the required finance, you can mortgage any residential, commercial or industrial property. The loan amount offered varies by lender and is equal to a particular percentage of the property value.

Home Loan

Home loan is a type of secured credit that allows you to buy or build your dream home. Following are the types of home loans offered in India:

  • You will need finance to purchase land for your new home.
  • Building a new house will require finances.
  • For renovation of an existing home or a new home.

Corporate/Business Loan

Corporate/Business loans are given to small and medium sized firms to help them meet various needs. These loans can be used for a variety of things that help a company thrive such as, purchasing equipment, purchasing merchandise, paying employee salaries, marketing expenses, paying off business loans, administrative expenses. payments, and even starting a new branch.

Unsecured Loan

Financial institutions offer different types of loans without any collateral depending on various things, such as repayment history, credit score of the borrower and other considerations. However, compared to other loans, these types of loans in India have higher interest rates. Following are several forms of unsecured loans that you can use for your needs.

Personal Loan

A personal loan is one of the most common unsecured types of loans that provide quick cash. It is available at a higher interest rate than a secured loan because it is an unsecured loan. If you have a good credit score and a high and consistent income then you can get this loan at a cheap interest rate. Personal loans can be used for a variety of purposes, including: wedding expenses, holidays or trips abroad, education loans, and more.

We saw what a loan is and how many types it has. With a loan a person can get financial assistance and fulfill his needs. There are many types of personal loans, like general personal loan, car loan, home loan etc. Each of these types has its own characteristics and its use depends on the needs of the individual. Additionally, applying for a loan online has become easier in the modern world. This system makes it easier and faster to apply for a loan. The online process requires you to fill the prescribed form, submit the required documents and your loan is approved by the appropriate financial institution.

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