The Various Applications Of Loans
Loans are forms of debts, and thus this means that the lender and the borrower would be involved in a kind of relationship whereby according to the agreed time of repayment of the loan, certain risks may befall them in accordance to with their assets and other securities provided.
How to loans work?
During the loaning process, the borrower approaches the lender to request assistance on a particular amount of money. This aforementioned amount is referred to as the principal and the borrower is hence required to pay that same principal back to the lender at the agreed date. Depending on the type of loan accessed, loans can be cleared in forms of monthly instalments or paying a substantial amount every six months. While requesting loans from family members may not be subject to interest, most loans acquired from private lenders and banks are subject to interests. The interest is the extra amount charged on the debt as an incentive that the lender may take part in the transaction. Legal loans and friend or family loans differ on that account whereby the contract enforces all the mentioned loan related covenants.
Types of loans
There are about four types of loans but two of the four types are mostly applied in the loaning procedures.
Secured loans for instance are used when the borrower intends to borrow a substantial large sum of money to be paid at a later date. This kind of loan is also a type of long term loan where collateral such as a car or property is required to act as security in case of anything. When the borrower may not be able to pay the entire amount within the agreed period of time, the lender will have the obligation to possess the asset provided as security to cover the remaining part of the loan.
Unsecured loans are the type of loans that don’t account for the borrower’s assets as collateral and are packaged according to credit card reports, the borrower’s monthly salary as well as possible positive history of the borrower engaging in similar transactions. Sometimes the interest rates that may apply on these loans may differ from one contract to another depending on the agreement of the lender and the borrower and is also sometimes under law regulations like in the UK where the consumer credit act of 1974 applies.
Demand and subsidised loans are all short-term loans that also differ to some length. For instance, unlike subsidised loans, demand loans could be unsecured or secured although their repayment dates are somewhat fixed.
Other types of loans
Commercial and personal loans can all fall under the main categories of loans but the repayment terms as well as other terms like the credit score may somewhat bring an entire new picture on the issuance of those loans and the interest to be charged on either. Loans are meant to provide the lender with security, not take advantage of the borrower to make more money in the process of lending the money.
Commercial Credit is typically broken up into specialties such as:
- Cash Flow Financing which is designed to assist companies with short-term loans to augment the borrowers’ existing cash flow to cover the daily costs of running a business while waiting to collect their receivables.
- Commercial Term Loans which are generally meant for purchasing items required for the business which can range from simple machinery to buildings to purchasing property.
- Business Leasing is a type of funding which is generally used for financing items such as vehicles, computers, equipment, furniture and the like.