Various Types of Loan

Loan is the amount of money that a borrower lends from the lender with some value of interest rate on that amount. There are various types of loans that are available in the market and you can take any type of loan that suits your requirements.

Various Types of Loan: Long Term and Short Term Loans, Secured and Unsecured Loans

The meaning of Unsecured Loans

Unsecured loan is something that is not supported by collateral security. These types of loans generally depend upon the borrower’s credit rating. This is the reason why such types of loans are difficult to apply for than the regular secured loans. Income of the borrower plays a vital role here. When loan is granted, it is not completely based on the credit achievement of the borrower. It is verified and completely dependent upon the overall goodwill of the borrower in the financial market, like the payment of debts.

Assessment criteria for unsecured loan

We know that unsecured loans are not safeguarded against any asset or property, in case if the borrower fails to comply with the payments on time it becomes very difficult for the lender to get back his money on time. Unsecured loans have high possibility of risk than the secured loan. Particularly, lenders take a note of the borrower’s credit history and records and when and how they have cleared and completed the payments on time.

Purpose of Rate of Interest

The rate of interest that is applied to unsecured loans basically depends upon the risk level and total amount of loan. With the increase in loan amount you will find a decrease in rate of interest and higher the risk more high would be the rate.

Meaning of Secured Loans

Loan that is supported by a security is known as a secured loan. If in any case the borrower fails to comply with the loan amount, the lenders may take possession of the asset or property collateral to the loan. Here, there is less chance of risk. The creditor has completely authority over the properly and can at any time sell the property or asset. Secured loan is a reprieve for creditors and mostly there is a financial jeopardy involved in it because it gives authority to the creditors to take the valuable assets when debt is not repaid.

Criteria for Secured Loans

As we all know secured loans are loan granted against collateral security, it becomes easy for the lender to get his money or payment on time. He can cover the payments without any loss. So in case the borrower defaults payment, there is less risk to bear for the lender. Risk level is low in comparison with unsecured loans.

Rate of interest determination

Secured loans are cheaper than unsecured loans. The companies verify the credit score of the borrowers and if the needs and requirement of granting such loans are satisfied then the companies can proceed with the loan. High value collateral and good credit score helps you get a very low interest rate. 

 

Long Term Loans

The loans that are taken for a period of at least three years are termed as long term loans under the definition that is given by the financial bodies. Nevertheless, these types of loans can be for maybe ten or twenty years as well. For any long term loan a guarantee is required. A security is to be given for getting the loan. The security can be a land, a property, any sort of asset etc. the rate of interest plays a vital role in the loan process. The amount of loan, the period that is decided for the repayments of loan, the income of the individual are taken into consideration for calculating the rate of interest.

Short Term Loans:

As understood by the name, these types of loans are for a short period of time. They do not have any compulsions as compared to long term loans. Short term loans are taken for payment of regular expenses. The amount that is granted as a loan is also a smaller sum is compared with the long term ones.