In financial terms, a loan is a borrowing of funds by one or more persons, institutions, corporations or other legal entities to another persons, organizations etc. The borrower is obligated to pay interest on this debt and also to repay the principal amount borrowed until it is fully paid. This can be done either through monthly payments or over a longer period of time. It is generally assumed that a loan will be sought for a business purpose, though other than that, there are instances when a loan can be had for personal or even for decorative purposes.
Loans, as they may appear are really not that difficult to understand. For example, you can take a bank loan to buy a car or a boat. The loan needs to be paid back within a specified period of time (usually in about four to five years) after which you can resell the same boat or car again or you can keep it. The bank requires that the money you borrowed has to be repaid with interest by the end of the specified period of time. In such cases, you would be considered a defaulter and will have to face the consequences of legal actions brought against you.
On the other hand, loans are very difficult to understand. First of all, the interest rate charged on a loan term is a very crucial factor. Interest rates are calculated based on the amount of the total loan and the duration of the same. In short, the interest rate on a loan term depends upon how much you can borrow and how long you plan to keep the loan over the term.
Before you get into the nitty-gritty of loans, it would be helpful if you could have an idea of what these terms mean. Basically, you take a loan from a lender which is called the creditor and you use the money for any purpose that you specify. You borrow against the principal, which is the value which the loan balance implies. The interest rate simply expresses the annual percentage rate on the borrowing. Here’s one important fact: if you borrow a thousand dollars at a two percent interest rate and you live up to twelve years, you will effectively repay your principal plus another thousand dollars every year.
There are two types of loans: secured and unsecured. Secured loans are the right to take out larger amounts of money while unsecured ones are meant for smaller sums. Loans that are secured are known as home equity loans, auto loans, mortgages, credit cards and student loans. Unsecured loans on the other hand are the credit cards, store card debt consolidation, personal loans and payday loans. With the rising interest rates, more people are opting for debt consolidation loans which allow them to combine all their existing debts into a single loan which is easier to pay off.
Although there are many benefits of debt consolidation, many people are not aware of the downside of these loans. One of the biggest disadvantages of these loans is that they require you to make a larger initial payment than unsecured loans do. They also come with high interest rates, longer repayment duration and a much longer repayment period. Since they are meant for larger amounts, borrowers are advised to consolidate all their debts before opting for debt consolidation loans.