Loan Definition & Types Of Loan

1. What is a Loan?

A loan is a contract in which a borrower receives a sum of money from a lender and agrees to repay that amount at some future date, along with any interest or fees. Loans are often repaid in installments over time. A loan does not need to be for one lump sum; sometimes there can be loans for things like appliances, cars, or property.

2. How does the loan work?

When you take out a loan, the bank doesn’t just give you the money. The first thing they do is check to see whether or not you would be suitable for that particular type of loan (for example, if you don’t have good credit).

If they decide that you are an acceptable candidate, then they will offer you some money. They might ask you to pay a certain amount of money or to provide some sort of collateral, such as a deed on your house or a piece of expensive jewelry.

In exchange for this loan and all that goes along with it, you sign a contract saying that you will pay back the bank at a specific time and interest rate (the interest rate is the percentage of the total that you will need to pay back over time.

For example, 2% interest means that you would owe twice as much in interest as the actual amount of money lent). If you don’t repay your loan on time or in full, they can go after whatever is kept as collateral.

Collateral Definition & Types?

3. Who can get a loan?

Anyone, really. People frequently get loans to buy cars or homes. Some people take out student loans so that they can go to college. There are even payday loans that you can get in just a few hours and use for almost anything! Everyone’s situation is different and each loan has its own requirements.

4. Types of loans?

The most common types of loans are mortgages, car loans, credit card debt, and student loans.

5. Loan interest rates?

Interest rates can be fixed or variable. If the rate is fixed, then it will stay consistent throughout the life of your loan (for example, if you borrow $10,000 at 6% interest, then you will owe $10,000 + (6% x $10,000) = $10,600 at the end of 5 years). However, if the rate is variable, then it could change over the life of your loan. For example, if you borrow $20,000 at 1% interest for 3 years and pay off your loan in full, then at the end of 3 years you will owe $20,000 + (1% x $20,000) = $20,200. However, if you chose to pay only the interest for 3 years instead of repaying your loan in 5 years and did not pay off your loan in full within that time period, then at the end of 3 years you would owe $20,000 + (3% x $20,000) = $20,600.

6. Loan eligibility criteria?

Every bank has different eligibility criteria, but they generally require you to be employed, have a regular income, and are of legal age.