Borrowing 101: The Bare Basics

Borrowing 101: The Bare Basics

Are you thinking of getting a loan? How about giving one? Maybe you just want a simple and precise definition for one? Well this article is for you welcome to the world of borrowing. They may seem complicated(depending on the type, it probably is), but this article will help you get familiar with the basics of it. Before we delve into the numerous types, it is important that we have a full understanding of what one truly is.

What is a Loan?

A most basic definition of it is borrowing some amount of money(though it does not always have to be money, it can be any physical item with some worth to it) with the agreement of paying it back to the lender in the future. Usually the lender and the borrower will be under contract, and the borrower will pay the lender installment payments until the debt is paid.

The Four Major Types of Loans.

Secured Loan- This type allows for a more confident transaction because the borrower must give up something as a promise to repay it. The thing being given up is known as collateral. The best example of this would be a home mortgage, where the borrower is allowed to live in the house (without paying for it) as long as the monthly payments are being made. It’s called secured because the banks can legally place a lien against the property if payments are not met. Eventually the bank will reposes the house and sell it in order to make up for the loss of money. In other words repayment is guaranteed.

Demand loans- These type of loans are not used as often, but carry special properties. For one, this type can be collected whenever the institutions wants(demands) them. Also, they carry interest rates that change based on the prime rates.

Subsidized Loans- are loans that do not carry heavy interest rates or low interest rates. A prime example would be college loans, as long as the student is enrolled in school, they will not have any interest attached to them.

Unsecured Loans- Unlike their counterparts(secured), these offer no collateral to the lender. This type is based on complete faith that the borrower will hold up their end of the bargain and pay their debts. Examples of these would be credit cards, personal loans as well as bank overdraft fees.

Borrowing can become very nasty business if not handled in a correct and professional manner, however if the borrower and lenders uphold their promise there is no reason why this exchange can not be a mutual beneficial one. Hopefully this article has shed some light on loans and their properties, and will assist you on finding and choosing the best type of loan for you.