Loan is a facility that can be availed in times when people run short of funds. It is an agreement where the lender agrees to give money to the borrower on a condition that he will repay it along with the interest. Since the loans come with an interest payment obligation, it is important for the borrower to know how can he reduce the interest charged. The ideal way is, the borrower should opt for the category of loan that best suits his purpose and has the lower rate of interest. The loans are broadly divided into two categories namely secured and unsecured loan.
Secured Loans- Secured loans are those that are protected against assets or collaterals. These type of loans are suitable when the borrower require a huge sum of funds for longer duration. Since these loans are secured the interest rate is comparatively lower. But in case the borrower is unable to pay off the loan the lender can sell off the collateral pledged to recover the amount. Loans like car loan, mortgage loan and home loan are pledged against security.
Unsecured Loans- These loans are not secured against any collateral or asset. The lender takes a risk while issuing such a loan hence the interest rate on these loans are higher. The other limitation of this type of loan is that it is available for shorter tenure. Also, the eligibility amount is decided on the basis of personal income. But, it is suitable for people who require funds urgently and do not want to engage in the lengthy process. Personal loan and business loan fall under this category.
The selection of loan depends on the requirement of the borrower. As the needs of the applicants are different so is the type of loan. The different types of loan are discussed below :
Types of Loan-
Personal Loan – Usually unsecured, a personal loan can be taken to fulfill any of the monetary requirement. It can be availed to meet the immediate needs of funds. The personal bank loan is the best option for individuals wanting small amount of funds for short duration.
Business Loan – Business loan is drafted to meet the business expenses such as purchase of assets or to finance the working capital requirements. These loans too are unsecured and therefore are issued after the assessment of the business venture. The bank loan for business are also called as SME loans and might be provided against the hypothecation of an asset.
Car Loan or Vehicle Loan – This type of loan is specifically made for people planning to purchase a vehicle. It is a secured loan where the collateral is the purchased bike or car. If the borrower defaults in paying the amount the lender can recover it by taking back the vehicle.
Home Loan – This loan product is for the aspirants who wish to own their house. It can be taken for purchase of new house, building a house or for extension of existing home. The tenure of this type of secured loan is relatively longer as the loan amount is high.
Gold Loan – As the name suggests the funds under this loan are lend against the security of gold. The applicant can mortgage the gold and get the funds easily.
Loan Against Property – This loan can be chosen when the applicant has a property to mortgage and want a large sum of funds for longer period of time. The loan against property is available at the cheaper rate of interest in comparison to unsecured loans.
To lower the amount of interest charged on a loan the applicant should apply for a secured loan. And if the need is urgent, the borrower can select unsecured loan to avoid time-consuming process.