Loan Industry Overview
June 21, 2010 by Guest Author
Filed under Debt
Loans are financial instruments that involve the transfer of finances between creditors and borrowers. Loans come in various kinds and forms. Some of the most common kinds of loans include personal loans, mortgages, payday loans and car loans.
The Lending Process
The loan process involves a borrower obtaining money from a lending institution. The amount of money borrowed is called the principal. The borrower is required to repay the creditor the total amount of money borrowed together with the accumulated interest at a later date. The repayment of loans is done in monthly, quarterly, or other installments, as provided in the loan agreement. Each installment is usually paid at a fixed rate. Loans come with a price and their price is referred to as interest. The borrowed amount increases at a fixed percentage that is linked to the principal.
Loan Types
There are two basic kinds of loans; secured loans and unsecured loans.
Secured loans – represent loans that require collateral or a guarantee. Creditors have a greater degree of security that the debt will be returned when collateral is involved. They may be in the form of any asset such as a vehicle, a home, or a piece of expensive jewelry. A mortgage loan is one good example of a secured type of loan. A mortgage loan is obtained by borrowers to purchase a house. The bank or mortgage company requires lien on the property title as collateral. The creditor holds the right over the property and gives it back to the borrower as soon as the loan principal and interest is repaid in full. Other types of secured loans include car loans and payday loans. Car title loans are one example of loans that can be borrowed for a shorter period of time. The borrower is given the opportunity to obtain easy money, but the risk and interest rate are higher while the payment term is shorter.
Creditors do not require a guarantee or collateral for granting unsecured loans. The majority of credit unions, banks, and other financial institutions grant unsecured loans. There is a variety of unsecured loans offered by financing entities. The most common unsecured loans include personal loans and credit card loans, together with bank overdrafts, corporate bonds, and lines of credit. The applicable interest rates for these loans depend on the borrower and creditor. Candidate borrowers with poor credit history are not grated unsecured loans in the USA. Unsecured loans are not granted against a collateral, provided that the borrower has proven income sources to repay them. The credit score of the prospective borrower determines his capacity to pay off the borrowed amount.
High Risk Loans
Car title and payday loans are among the loans to be avoided, if possible. Car title loans and payday loans share some common characteristics. These short-term loans come with extremely high interest rate. Borrowers are allowed a month to pay off before the loan builds up more interest and surcharges. The debtor has to pay the additional charges as soon as possible because they accumulate. High risk loans typically represent the last option for borrowers who are in desperate need of money. Individuals should be aware that some businesses are involved in predatory lending.. This practice is a form of abuse, with the lender giving a loan in order to take advantage of the borrower.
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