What is a Loan?

The simple meaning of loan in financial parlance is a sum of money that is borrowed and is expected to be repaid with interest in a certain time period.

There are 3 basic and key components of any loan:

  • Principal Amount
  • Rate of Interest
  • Time Period

1. Principal Amount:

The principal is the amount of the loan which is to be paid by the borrower to the lender without including the interest. In simple words, it is the original amount of money borrowed before any applied interest.

2. Rate of Interest:

The interest rate is the percentage of the principal amount paid by the borrower to the lender annually for the use of any kind of asset.

3. Time Period:

The time period can be defined as the fixed term or period for which the loan is taken and is supposed to be repaid back in that specific time limit.

Depending on your loan agreement the time period of your loan can vary. It can be a short term loan from one day/one month to a long term loan of 30 years.

Loans play a vital role in satisfying an individual’s financial requirements. There are different types of loans for different purposes like higher education, starting or expansion of business, buy or renovation of a house, purchasing a new vehicle and so on. Let’s discuss them which might help you to select your type and requirement.

TYPES OF LOANS

# HOME LOAN:

Home loans are generally taken for buying a house/flat, or a piece of land forward constructing a house. It can be taken for renovations, repairs and extensions to an existing house.

Before starting the process of taking a Home Loan the borrower should figure out his/her total eligibility depending on the repaying capacity, which is based on the monthly income, assets, liabilities, income of the spouse, income stability, etc.

The interest rates for a Home Loan can be fixed or floating (flexible).

  • Fixed interest rates: The rate of interest is fixed for the entire time period for which the loan is taken.
  • Floating (Flexible) interest rates: The rate of interest is not fixed for the entire time period.

# PERSONAL LOAN:

Personal Loans are the most marketable loan amongst all the other types. The most attractive feature of this loan is that it can be used for funding any of your requirements like planning a holiday with family, buying home appliances, unexpected medical contingencies, buying a vehicle, marriage expenses, etc.

Personal Loans are unsecured loans, in other words, the borrower does not need to secure any of his assets against the loan. As no assets like gold, property, etc are secured against the loan, in case of default the lender (bank or any non-financial company) cannot auction the borrower’s personal owns.

Being an unsecured loan, the rate of interest on personal loans is higher than other types of loans because of the perceived risks while sanctioning it. To understand this better, check out personal loans from Asteria.  

# BUSINESS LOAN:

Business loans which are also known as commercial loans are secured loans provided by a bank or any non-banking financial company to support the immediate or uncertain financial needs of a business.

Any type of business such as a private company, partnership firms, retailers, individuals who are self-employed or intending for start-ups, sole entrepreneurs can avail of this loan.

Depending on the borrower’s profile, a lender can offer the loan on a fixed or floating rate of interest. As it’s a secured loan, in case of default, liquidation of assets is possible to pay the dues.

# EDUCATION LOAN:

As the name suggests, it’s a type of loan to help the students pay for their higher education anywhere around the world. Under this loan student’s exam fees, tuition fees, books and other supplies and all the other expenses are covered including accommodation.

The loan amount sanctioned and the rate of interest at which it is given is different for different banks. An education loan can be taken for any field like medical, engineering, management, etc either for graduation or post-graduation. These loans are also available for any part-time or full-time courses.

Conclusion

Earlier it was not easy to access loans from banks or any other non-banking financial companies, but today the procedures for procuring loans have become much easier and quicker because of advanced and systematic online banking systems.

With the help of the above-mentioned information, you can decide which loan works out best for your personal or family needs.