A loan is form of a debt normally considered in terms of money. Apart from money any other material like equipment, materials, vehicles etc can be taken on loan. In monetary loans a lender gives money to a borrower with some terms and condition. Now the lender actually plays with the borrower under the clauses of "terms and condition”. Borrower especially students or new persons at time of taking money don’t read these terms and conditions carefully as one is more concerned about money at that time but the problem happens later. loan is provided on account of extra money termed as loan which lender will get from the borrower. For e.g if the lender gives $1000, he/she may get $1100 back, depending upon the interest rates. Borrower has to return the money to lender in form of installments. These installments can be regular or irregular depending upon the terms but what ever the case may be in start borrower pay the installments according to schedule but later it becomes burden on the borrower. He/She becomes irregular in paying the installments and their ones trouble start. The penalties are heavy and it’s difficult for a borrower to repay because no one knows of future. Apart from interest, additional restrictions may be added to the loan terms.
Now the question is who is the lender? The simple answer can be that any person having money can be a lender but normally the financial institutions are the lenders. These institutions are giants so they can easily enforce the terms mentioned in the contract and conditions.
Types of loan:
There are two main type of loans,
a. Secure loans
b. Unsecured loans
a. Secure loans: These are the loans in which the borrower provides some type of guarantee in form of some of his/her property (house, car etc) .There are various type of secure loans,
1. Mortgage loan: In this borrower pledge the house which one will get after paying the loan money and if borrower defaults then house is of lender.
2. Auto financing: These are the loans for automobiles. There are two types of auto loans.
A direct loan is the one in which bank gives the loan direct to a borrower. An indirect loan is the one in which bank gives the loan to the automobile manufacturer/dealer and they act as intermediate party.
b. Unsecured loans: These are the loans in which bank don’t pledge anything of borrower. These are given to the customers depending upon their credit ranking under the umbrella of various packages varying from institution to institution. These loans can be,
1. Personal loans
3. Credit cards
4. Corporate bonds
5. Student Loans
The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law.
General Loan rules:
Every country has its own rules and regulations but generally following rules are being followed,
1. Loan is not considered as gross income to borrower as he has to return it.
2. Similarly repayment of loan is not considered as gross income to the lender. However, Interest paid to the lender is included in the lender’s gross income.
3. Interest paid to the lender may be deductible by the borrower in some cases.
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