Financially speaking, a loan can be defined as a debt that is evidenced by a document or a note that specifies, along with other things, the principle sum of money, the rate of interest, and the date on which the loan is set to be paid back. A loan, technically entail the assets of the subject for a particular period of time, between the borrower and the lender.
While taking what may be termed as a loan, the borrower initially receives a particular amount of money, which is termed as principle. That borrower will be liable to pay back that amount to the lender within a certain period of time. In general, the loans are rapid in several installments though one time repayment is also quite common. In case the loans are repaid in installments, they are paid in annuity, which means each and every installment is of identical amount.
When the loans are provided, a cost that is termed as interest is charged on the amount of the loan. This extra amount acts as an incentive to the lender of the loan and it is this amount which actually is the profit that drives the lender in giving out the loans. In case of legal loans, these parameters and terms & conditions are enforced through a contract or a written agreement that both the parties – the lender as well as the receiver of the loan agree. It is this written agreement that put the borrower of the loan under certain additional restrictions which are termed as loan covenants.
The loan for taking which, the borrower has to pledge some of his or her property or property or asset as collateral can be termed as secured loans.
Monetary loans that generally are not secured against assets or properties of the borrower are termed as unsecured loans. Unsecured loans are generally available from various types of financial institutions under a number of guises as well as marketing packages that may include
- debt for credit card
- personal loans
- bank overdrafts
- credit facilities and various credit lines
- corporate bonds which may either be secured or unsecured
Interest rates on the unsecured loans are in majority of occasions higher than those for the secured loans. The reason behind this is the fact that the options of an unsecured lender against a borrower in case of default are strikingly limited.
Demand loans are certain types of loans that are taken on short term basis. Generally, there are no fixed time periods for repayment of these loans and these loans carry a rate of floating interest which may vary in accordance to prime rate.
Subsidized loans are loans on which the rate of interest is minimized by the presence of a hidden or explicit subsidy.