A loan is an amount of money that one party gives to another.
The party that gives money is known as lender and the one that
receives money is known as borrower. Lenders have surplus funds
that they lend to borrowers who have an urgent need of money. In
return, lenders charge borrowers a fee known as interest.
There are several types of loans:
Secured & Unsecured Loans Secured loans are loans that
require borrowers to offer their property as collateral. This
reduces the risk for lenders and they charge low rates of
interest. Unsecured loans, on the other hand, do not require
collateral and consequently, they carry high rates of interest.
Fixed Rate & Adjustable Rate Loans In case of fixed rate
loans, the rate of interest remains the same all along the loan
period. As a result of this, the amount of monthly payments
remains the same throughout the loan period irrespective of
changes in the interest rates prevalent in the market. On the
other hand, the rate of interest on adjustable rate loans and
monthly payments keep changing as the interest rates prevalent
in the market fluctuate.
Hybrid Loans
Hybrid loans are a combination of fixed rate and adjustable
rate loans. In the beginning, the rate of interest is fixed.
After a few years, the interest rate becomes adjustable and
starts fluctuating.
Balloon Loans
In case of balloon loans, the borrower has to pay a very small
amount of monthly installments so that a large unpaid balance
remains at the end of the loan period. This large unpaid balance
is repaid at once when the loan period expires.
Home Equity Loans A home equity loan is a second mortgage
loan that is taken when your house is already mortgaged and you
are in a need of more funds. Home equity is the value left in a
house after subtracting the unpaid mortgage balance from the
current value of the house.
Debt Consolidation Loan A debt consolidation loan is a
loan taken to consolidate a number of loans into one manageable
loan. A debt consolidation loan can help you in reducing the
cost of your total debt as it usually carries a lower rate of
interest than your existing loans.
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