A loan is a type of financial debt. When applying for a loan, the applicant or the borrower asks for money from a lender. The lender is usually a financial institution such as a bank. The borrower initially receives an amount from the lender and then the amount must be paid back depending on their payment terms and in an amount depending on interest rates that both parties have agreed upon.
There are two main types of loans. First is the secured loan and the second is its opposite: the unsecured loan. Payment of secured loans is guaranteed with the borrower using an asset like a real property or a car as collateral for the loan. People who buy real estate such as houses or lots usually apply for a mortgage loan. Real properties are the usual collateral for mortgage loans. If in case the borrower fails to fulfill his or her duty to pay for the loan, the lender may get and own the purchased property legally.
Auto loans are also classified under secured loans because when you loan for a car, lenders often take in your existing car or the purchased car itself as collateral. There are two types of auto loans: direct and indirect. Direct auto loans are loans where the amount is given directly to the borrower. In indirect loans, the car dealer acts as intermediary between the borrower and the lender.
An unsecured loan is the second type of loan. This type of loan usually deals with money and is not guaranteed against the borrower’s assets. This monetary loan may also be applied from banks and other smaller financial institutions. Interest rates applicable to unsecured loans may change depending on the lender and the borrower. Each country may or may not have regulatory laws for this type of loan.
Among the many kinds of unsecured loans, personal loans and credit card debt are the most commonly applied for. The interest rate, payment term, and size of loan under the unsecured type depend mostly on the borrower’s credit rating. For personal loans, the borrower is individually responsible for the repayment of the debt. Credit card debt is somewhat a special kind of personal loan because you do not get the amount borrowed in bulk. Credit card users usually charge their purchases in their credit line and the credit line is applied for and determined by the bank. The credit limit for the line is determined also through credit rating.
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