There are a lot of people around the world today that live with the help of loans. Loans are money provided to a lender by a borrower with the promise of returning the money with a set interest rate and deadline. There are several different types of loans out there that people can apply for, when in need of a number of things. Some people may want to apply for a loan to help fund a business that they plan on opening. Others may need a loan to pay for unforeseen expenses, such as medical bills. There are also others that may just need a loan, when money is tight at the moment. Whatever the reason may be behind applying for a loan, people should know that there are several different kinds of loans that could be applied for.
Availing loans
Loans can be applied for from a number of lending institutions. There are companies that run loaning businesses, all around the world. The bank is also a source for loans. Aside from that, there are many individual and private loaning groups that people can talk to if they would want a quick loan. Even borrowing money from a friend or from a family member may be considered as a type of loan.
The 2 categories of loans
In general, we can classify loans into a number of main categories. Two of the most common categories of loan types are the secured loans and the unsecured loans. First, let us discuss the secured loan and its advantages and disadvantages.
With security
With a secured loan, the borrower would need some sort of collateral before any lending takes place. The asset of the borrower which will be given as collateral should have a value that is greater than the money to be loaned. This is done to make sure that the lender does not get cheated by the borrower and so that the borrower will really make it a point to pay the loaned amount back. The collateral will only be returned once the borrower pays back the lender. An example of this is caveat loans. These are short term loans in which a caveat or security is placed against the loan, where the security is generally an asset of great value such as a motor vehicle or a property.
Without security
Unsecured loans are loans that do not need any collateral from the borrower hence the word unsecured. While this may be a bit risky on the lenders’ side, loaning institutions that give out unsecured loans may sue borrowers that do not follow the terms of the loan agreement.
Unsecured loans can come in the form of credit card debt. Borrowers who do not pay their credit loans after a certain period time may go down on their credit score. A bad credit score can be reflected in many places and people with bad credit scores would find it hard in the future to borrow money from any credit card company. Unsecured loans usually have higher interest rates than secured loans since no collateral is given. The interest rates vary depending on the loaning institution and their terms.