what is bank loan and its types?

what is a bank loan and its types?

what is a loan? A loan is a sum of money that an individual borrows or received from his sources as it can be his friend, relative, bank, or any financial institution which he needs to repay in the future along with interest, charging on the principal amount. when a loan is given it creates fear in the mind of the lender as might in the future the recipient will not be able to pay the money back so what he will do? so he secures himself by keeping some asset of the recipient in form of security it can be anything like property, shares, land, etc.

when a loan is given then the recipient and lender must have agreed upon the terms and conditions of the agreement before joining hands otherwise it will create disturbance in the future now it has become a legal matter so one needs to be very careful while choosing the path of bringing loan for diminishing financial problems like whether I will be able to pay the installment or not? will I be able to pay the principal amount along with its interest? as it is not everyone's cup of tea to have it.

Advantages of Bank loan 

  • Retain profit: 

it helps in retaining profit for an org as when it raises money through shares or equity then it needs to share its profit among all investing parties which decrease its own profit but in the case of the bank you just need to give interest, no profit is shared.

  • tax saving: 

when an org takes a loan from a bank it doesn't need to pay tax by the inclusion of it as it is considered a tax-deductible item so it saves the profits of an org and saves them from tax.

  • cheapest interest rates: 

it is quite a cheaper source of income compared with overdraft and credit cards.

  • flexibility: 

loan provides flexibility in repaying the amount as you can pay according to your convenience as long as the installments are regular and timely but in consumer credit cards, there is a limit beyond which you can't go.

Disadvantages of bank loan

  • difficulty in financing: 

As when an org takes a big amount of finance from a bank then the bank demands collateral security on which they provide the loan but the new business finds it difficult to perform its operations based upon a bank loan.

  • irregularity in payment: 

when there is a long-duration loan taken then its interest charges differ monthly which creates variations in payment so it diminished the interest of the individual in considering it as a source of income.

types of loans:

various kinds of loans are being offered by the banks to an individual which is categorized into three ways.

1: Secured and unsecured loans:-  

As it is being cleared from name secured which means when an individual takes a loan from a bank then it demands some kind of collateral security for securing its money to recover the amount in the future if that person does not pay. the assets which an individual can keep in form of security include any stocks, bonds, personal property papers, etc.

 some common features of secured loans are timely payment foundation, lower interest rates long repaying time duration, and harsh borrowing limits for instance mortgage, and auto loan comes under this kind of loan category.

on the contrary unsecured loans do not own any kind of collateral security, it is just being offered as per the client's status, repaying capacity, or track record of his previous transaction which helps the bank to decide whether to award the loan or not to that person.

2: Open-End  and closed -End loans: 

open-end loans are those loan in which an individual has the liberty to borrow money, again and again, credits cards is a perfect example of this although they also have some credit restriction it is up to that individual whether he wants to spend his whole money or some chuck of it on the other hand with close-end loans, the individual can not borrow again until he has not repaid his previous one but if he wants more money then he needs to apply for a new loan from scratch.

3 conventional loans:

it is that type of loan which is in the form of a mortgage as it is not being issued by the government agencies.

things to remember while considering a bank loan:

  • when a person demands a loan then his credit score should be good as it shows his ability to repay the amount if a person has a good credit score he has a higher chance of approving his loans by the bank because it gives an idea to a bank about that professional payment habits.
  • when a person is thinking of a loan then he should analyze his income as he needs to submit his documents like his salary letter, and in the case of a self-employed person, he needs to give the tax return for his last two years so he should see his payment capacity before deciding anything.
  • before applying for a loan an individual should check his monthly obligation as he needs to manage it along with his installment so be careful unless it will be difficult to handle in the future.

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