Loans – tips that you need to know!

Loans – tips that you need to know!

In our daily life, the word ‘loans’ is a very familiar financial term. We frequently use loans to meet our financial needs. Loans are basically debts and credits that are lent to a person or organization to meet their requirements. Any material thing that can be lent can also be taken as a loan. Loan is a very popular debt instrument. However; loans are usually applicable for financial assets or more generally for money. Here we shall discuss monetary loans. You will get a brief idea on words like personal loans, consolidation loans, secured/unsecured loans etc.

All loans essentially involve two persons or parties – a lender and a borrower. Loans are usually provided on certain conditions that are called loan covenants. Loan covenants set out the restrictions, legal actions and other conditions that are agreed upon by the borrower. Generally loans are paid back by the debtor to the lender within a timeframe mutually decided upon by them. This framework may be of monthly or yearly installments or one-time payback. This arrangement is made available through a charge/cost known as ‘interest’.

In ancient times loans were provided by individual persons with written or verbal loan covenants. Those loans were not ‘secure’ due to the lack of legalities and compliance mechanisms. Both debtor and lender remained at risks. Although the practice continues in many parts of the world, today, loans are more commonly available from financial institutions like banks etc. It is also a business obligation for most of the financial institutions. Loans from these institutions are much safer since they are regulated by a set of legal bindings. It is the most profit earning instrument for the institutions since it involves diverse interest rates charged on a borrower.

Broadly loans can be categorized in two types – secured and unsecured. In secured loans the borrower usually pledges his personal property as a bailment or security of paying the debt. The pledging may include his car, home etc. Unsecured loans are more common to us all as they are more easily available from banks and other financial institutions. They are not conditioned on borrower’s asset. They come under different packages and schemes like corporate bonds, credit card debt, bank overdrafts, personal loans, lines of credit or credit facilities etc.

A personal loan is an unsecured loan that provides consumer credit approved for personal use. They are based on borrower’s personal profile, integrity and ability to pay. Personal loans are also known as consumer loans in banks and financial institutions. They are provided to buy homes, apartments, lands, household goods and items of personal effects. A wide range of attractive packages and offers with competitive interest rates are normally available with personal/consumer loans.

Consolidation loan is another type of loan. This is also known as debt consolidation loan or program. According to the financial dictionary consolidation loan is “a loan that is used to combine and finance payments on other loans”. As the name and definition implies this is a type of loan or debt repayment program for consolidating one’s debts. In this program you come to an agreement with the loan provider and declare your outstanding loans and accounts. The loan providing company then contacts your other lenders to secure more favorable interest rates and even waive-off late fees. These loans are provided normally within the home equity loans therefore become a secured loan since your home is involved. They normally take heavy interest toll on borrowers with longer payback time.

It is always wise to consult a financial expert about loans whether it is a personal or a consolidation loan. The expert consultant can always find out hidden conditions or strings attached to a loan and can advise you accordingly.

About the Author

Scott McGready is author of this article on personal loans. Find more information about consolidation loans here.