There were times when finding credit was difficult, and money lenders were outright wicked. Remember Shylock from Shakespeare’s, The Merchant of Venice, or for instance our local Sahukaar. But today the scenario is different. Many financial institutions are competing with each other to lend you money.
Loans are a form of financing whereby you borrow money from a lender to purchase a vehicle, a home, go on a vacation, for education or to buy jewelery for your loved ones. For just about any thing, you can find a loan available. Loans are also referred to as a line of credit.
We can borrow money from friends, family or from banks and financial institutions. These institutions provide credit to consumers like you and me, with the understanding that we will repay the money borrowed, with interest, on a defined schedule.
The current global financial crisis has affected the availability of credit, however you can still shop for a loan and get one fairly easily, albeit at a slightly higher interest rate.
The availability of quick and easy loans does not mean that you should start taking loan for every thing. It is very important that you deal with Loans with utmost caution.
Loans are broadly classified in two types :
- Secured loans, and
- Unsecured loans
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.
A mortgage loan is a very common type of secured loan, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security, that is, a lien on the title to the property, until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the property and sell it, to recover its dues.
Similarly, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. Here the lender marks a lien on the Registration Certificate of the car. The duration of the loan period is considerably shorter often corresponding to the useful life of the car.
Unsecured loans on the other hand are not backed by any collateral security or borrowers assets. These loans are based solely upon the borrower’s credit rating.
Such loans may be available from financial institutions under many different guises or marketing packages, such as, credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit,
The interest rates applicable to these different forms may vary depending on the lender and the borrower and tend to be higher than a secured loan as the element of risk involved for the lender is higher.
In this series we will discuss all about loans and mortgages. Meanwhile, watch this interesting video from the Common Craft Show,that explains the basics of borrowing money :