What is a Loan?

Define Loan

A loan is a term used for the money that one or more individuals or companies borrow from banks or other financial institutions for their financial needs. Banks or other financial institutions lend them money for some interest for the agreed duration of time. The borrower has to make monthly payments to these banks or financial institutions based on the rate of interest and the amount of money they borrowed from them.

There are different types of loans. Mainly the loans are classified into secured and unsecured, open-end and closed-end, and conventional types. In a secured loan, the borrower has to put some assets as collateral. Most financial organizations would ask borrowers to present deeds or other documents showing their ownership of the asset until the full payment of the loan is done. The commonly put assets are houses, bonds, cars, stocks, etc.

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People tend to apply for secured loans when they want to borrow large amounts. Lenders are mostly unwilling to give large amounts of money without any collateral; hence, they hold the borrower’s assets as a form of guarantee. Secured loans come with low-interest rates, long repayment periods, and stricter borrowing limits. A mortgage loan, auto loan, and boat loan are all examples of secured loans.

In an unsecured loan, the borrower does not have to give any asset as collateral. In this, lenders offer loans to borrowers after assessing their financial status. Post that, only they estimate the borrower’s capacity for repayment. Education loans, personal loans, and credit card purchases are all examples of unsecured loans. These come with high-interest rates.

In an open-end loan, the borrower has the freedom to borrow over and over. Credit cards and lines of credit are some examples. But these come with credit restrictions. Credit limit denotes the maximum amount of money that the borrower can borrow. Depending on their financial needs, an individual can use all or just a portion of this limit. Whatever amount they use will be decreased from the credit limit. In closed-end loans, borrowers cannot borrow again until they have paid their previous loan.

The loan balance would decrease as the borrower makes the payment for the closed-end loan. If the borrower is wanting to have more money, then they need to apply for another loan. Mortgage loans, student loans, and auto loans are some examples.

A conventional loan is the term used when applying for a mortgage. The loan is not insured by government agencies such as RHS in this case.

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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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