In financial terms, a loan is a borrowing of money by one or many persons, institutions, companies, or other entities towards other persons, companies etc. The borrower is liable to repay the principal amount borrowed and also interest on that amount until it is fully repaid. Usually, loans are taken for any business purpose like purchasing a factory or building, purchasing vehicles and tools etc.
There are various types of loans available in the market. Small business line of credit (SBL) is a type of loan which is used to pay back the amount lent plus interest over a specified period of time. This type of loan has a shorter repayment period, which may be up to five years. If the company does not require any immediate cash, then they can extend this loan. If they need money urgently, then this type of loan will be the best option.
Unsecured loan is another type of financial product that can be availed by people with adverse credit history. But, people with bad credit history should first find out the reason for their bad credit history before applying for an unsecured loan. They should have to convince the financial institutions about the true and actual nature of their business, financial status etc so that the interest rate on this loan can be lowered. The loan will be approved only if the financial institution is convinced about the applicant’s repaying ability.
Two other types of loans are secured and unsecured. Secured loans require collateral to be put up before the lender. And if the borrower defaults on the repayments, then his security will be confiscated and sold to get back his lent money. However, an unsecured loan does not require collateral. Thus, people with bad credit history can also get approved for this loan without any difficulty.
One more type of loan is a Balloon loan. This is a type of unsecured loan that gives a very high interest rate compared to other secured loans. In this type, the loan principal amount plus interest rate are equal to or greater than the value of the collateral at the time of the loan approval. Thus, when the borrower repays back the loan, then he will get back only the amount of principal payment less the interest rate. This is a risky loan, because if the borrower defaults on the repayments, then his security will be confiscated and sold to the concerned authority for repayment.
Before approving a loan, the lender first calculates the amount of loan that a person can take as collateral. This will be done by using some interest rates and loan repayment tables. The calculation is often based on the current market rates. The lender must make sure that the borrower’s potential loan principal amount plus interest rate are larger than the market value at the time of approval. In case, if the lender’s calculations on the loan application are incorrect, then the lender must inform the applicant about the possible consequences.