Understanding the Different Types of Loans

Will it surprise you to learn that most of the terminology connected with modern accounting has been derived from the Latin or Greek languages?

For instance, the term credit is a derivative of ‘Credo,’ a Latin word that nearly translates to “I Believe!” Isn’t that the most appropriate word to underline that element of trust involving financial transactions? Long ago, borrowing and lending was guaranteed through word of mouth and not any written documents. At that time, credit didn’t essentially involve cash. The bartering of services and goods involved credit. Visit:- installment loans for your financial help today

In modern world, the word credit refers to a monetary transaction. These days, the agreements and contracts between two different parties, involving the giving and receiving of materials and money are very long, and often use legal terms, which are usually not understood by a common man.

Credit stands for delayed payment, meaning the supplier of services or goods provides the needful to the buyer and waits for a definite amount of time to collect the payment. This belated payment is called ‘debt.’ It is the creditor,or lender, who offers credit to the borrower, or debtor.

Any specific amount of money provided to a person for taking care of his household, family, health, education or any personal purpose is called a ‘loan’, and the process is known as consumer lending, consumer credit or just retail lending. Following are a few of the most common types of loans

  • Single loan: Also known as bridge or interim loan, such a loan is for short-term. Such loans need to be paid back at the expiry of the loan period, along with the interest and the principal amount.
  • EMIs or installment loans: Such loans are paid back regularly at predefined intervals of time, most often monthly. Vehicle loans and home loans fall under this category. The longer is the period of paying back, the larger is the interest amount paid.
  • Secured loans: When the borrower offers certain personal possessions as collateral, which the lender can use for recovering the loan when the borrower fails to pay back the loan, it is termed as a secured loan. The most usual collateral is a house. Usually, secured loans carry lower rate of interest.
  • Unsecured loans: Loans that are not secured through collateral are called unsecured loans. Generally, such loans are offered to borrowers having outstanding credit ratings, usually companies or individuals with high net worth.
  • Loans with fixed rates: The majority of loans for consumers fall in this category. The rate of interest remains unchanged all through the duration of the loan. However, the interest rates for these loans are often larger than those for loans with variable rate of interest, as the lender would like to take into account the probability of market fluctuations.

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