The banking awareness section is one of the most important sections in General awareness. We have seen in the past exams that a number of questions are asked from this topic. This topic will not only fetch you those extra crucial marks but will also be helpful in cracking your interview. If you are a banking aspirant then you must know that loan is like an asset for bank. You must have heard this term multiple times but you might not be familiar with its depth. In this article, we will be discussing related to loan & its type. So, make sure that you read this article carefully to learn and understand this concept.
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What Is Loan?
A loan in simple language is a specified amount of money borrowed with an assurance to return it back in an agreed period of time. Bank usually acts as a lender and it levies a certain rate of interest on the money lent. Loans are the basic principle on which the banking model works and that is why loans are considered as an asset. Banks are encouraged by different government policies and RBI policies to lend money. The Person who is a borrower repays the amount along with the interest in installments as per the agreement between the parties.
Types of Loans:
Now, that you have understood what exactly a loan is? the next question is how many types of loans are there. So , there are two types of loans namely:
- Secured Loans
- Unsecured Loans
Secured loans are those loans that require collateral. The term collateral refers to the assets that you have to provide to the lender as a security against the money you are borrowing. This asset will be sold to recover the money from you in the case by any means you fail to repay it in the given amount of time. The rate of interest incurs in secured loans is comparatively lower than the unsecured loans.
Types of Secured loans
A home loan is an asset that is used to borrow money from banks and hence it is categorized as a secured loan. If a person wishes to build their own house, they can apply for this loan. Banks act as a lender to provide funds to build or buy a home. Loan is given against the house a person wants to buy or build.
Loan against property (LAP)
Loan against property is another form of the secured loans where the borrower pledges any residential, commercial or industrial property for receiving the funds required to him. This loan is generally taken for higher studies etc.
Gold jewelry or biscuits are popular forms of secured loans from ancient times. Here, gold jewelry act as collateral.
Unsecured Loans are the type of loans that do not require collateral. A person can avail unsecured loans easily with a good credit score history and associations of the past. The rate of interest charged in this type of loan is comparatively higher than the secured loans due to the lack of collateral.
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Types of Unsecured loan
This is one form of Unsecured loan and it is one of the most popular and common types of unsecured loans. The rate of interest charged on this will be higher as this is an unsecured form of a loan. These loans are usually given to those who have a stable income as well as a good credit score. There are various reasons for which people take personal loans some of them are: wedding, vacation or an international trip, for home renovation projects, child’s higher education, etc.
Short-term business loans
This is another form of unsecured loans and usually people having businesses take this loan to meet their daily expenses in the business. This loan is taken by small enterprises, startups etc. The reasons for taking this loan are various for example- for buying new Machinery and equipment, to rent a new space urgently and also to meet the unexpected expenses.
People usually take Education loans for higher education and are very popular among students. This loan covers the basic fees of the course along with other expenses such as the accommodation (Hostel fee), exam fee, etc. While taking an education loan, the student is the main borrower of the loan while the parents, siblings and spouse are co-applicants. An education loan is of various types like- it can be a full-time, part-time or vocational course along with graduation and post-graduation courses in various fields like management, engineering, and medicine, among others.
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This is another form of unsecured loan. People take this loan either to start their business related to transportation or to buy vehicles for their personal use etc. Again this loan doesn’t require collateral hence the person who is taking the loan needs to have a good credit history.