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What Is a Loan?

A loan is when one receives finance from a bank, friend, or some finance entity with the assurance of returning it in the future along with the principal as well as the interest. Principal is the borrowed amount, and interest is the charge on receiving the loan. Considering that lenders take a risk by offering you the loan facility and the fear that you may not be in a position to repay the same,, they have to protect the losses by charging an amount in the form of interest.

Mostly loans are categorised as secured or unsecured. Secured loans pose the need for promising an asset such as a car or house as a loan collateral in case the borrower defaults, or does not repay the loan. In this case, the lender gets the possession of the asset. Unsecured loans are sought after, yet less common. In case the borrower fails to pay back an unsecured loan, lender cannot take anything in return.

Types of Bank Loan:

1. Unsecured personal loans

Personal loans are used for a variety of reasons, from paying for wedding expenses to consolidating debt. Personal loans can be unsecured loans, which means you’re not putting collateral like a home or car on the line in case you default on your loan.

2. Secured personal loans:

To get a secured personal loan, you’ll have to offer up some type of collateral, like a car or certificate of deposit, to "secure" your loan.

3. Payday loans:

Payday loans are short-term, high-cost loans that are typically due by your next payday. States regulate payday lenders differently, which means your available loan amount, loan fees and the time you have to repay may vary based on where you live. And some states ban payday lending altogether.

4. Title loans:

If you own your car, you may be able to take out a car title loan. You can typically borrow between 25% and 50% of your car’s value. Title loan amounts often range from $100 to $5,500, according to the Federal Trade Commission, and you’ll usually have to repay your title loan within 15 to 30 days. If you don’t, your car could be repossessed.

5. Pawn shop loans:

A pawn shop loan is another fast-cash borrowing option. You’ll take an item of value, like a piece of jewelry or an electronic, into a pawn shop and borrow money based on the item’s value.

6. Payday alternative loans:

A payday alternative loan is a short-term loan offered by some federal credit unions. A PAL is designed to be more affordable than a payday loan. Payday alternative loan amounts range from $200 to $1,000, and they have longer repayment terms than payday loans - one to six months instead of the typical few weeks you get with a payday loan.

7. Home equity loans:

A home equity loan is a type of secured loan where your home is used as collateral to borrow a lump sum of money. The amount you can borrow is based on the equity you have in your home, or the difference between your home’s market value and how much you owe on your home. You typically can’t borrow more than 85% of the equity you have in your home.

8. Credit card cash advances:

Your credit card may offer a cash advance, which is a short-term loan that you borrow against your card's available balance.

Benefits of Taking Out a Personal Loan:

  • Potential for Higher Borrowing Limits Than a Credit Card.
  • Potential for a Lower Interest Rate Than a Credit Card.
  • Collateral Usually Isn't Required.
  • Easier to Manage Than Multiple Credit Card Accounts.
  • Predictable Repayment Schedule.
  • Longer Repayment Term Than Some Alternatives.

Advantages of Bank Loan:

A bank loan allows one to repay as per convenience as long as the instalments are regular and timely. Unlike an overdraft where all the credit is deducted in go. Or a consumer credit card where the maximum limit cannot be utilised in one go.

Cost Effectiveness:
When it comes to interest rates, bank loans are usually the cheapest option compared to overdraft and credit card.

Profit Retention:
When you raise funds through equity you have to share profits with shareholders. However, in a bank loan raised finance you do not have to share profits with the bank.

Benefit of Tax:
Government makes the interest payable on the loan a tax-deductible item when the loan has been taken for business purpose.