Almost every one of us heard of the term loan at least once in our life. Some might know what it is and some might have no idea. Don’t worry by the end of this article you will get to know all the basics about loans and how they work.Â
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. all of us must have taken a small amount of loan from our friends before, for example taking 20 bucks from your friend to buy something and returning them after a while is also a loan. However, your friend doesn’t expect you to pay interest for such a small amount. That is the difference between a loan you get from official financial organizations and a friend. Well, if it is a huge amount even your friend would expect you to pay interest.
To elaborate on that, for example, you borrow a total of 1000 dollars from your friend and he expects you to pay 2% interest. 2% of 1000 is 20, so you will have to pay them an extra 20 dollars every month until you give them back the amount you borrowed. To ensure security on the loans a note is signed by both the borrower and the lender, namely the promissory note it has details like the amount borrowed, the interest rate, the time given to repay the loan, etc.
There are mainly two types of loans, an open-ended loan, and a close-ended loan. An open-ended loan has no fixed time for you to repay. For instance, your credit card is technically a loan because they aren’t your savings and you pay the interest every month but it doesn’t have an end to when you can pay.Â
And then comes the close-ended loan which has a particular time for you to repay the loan and in case you fail to do so the lender takes over the surety property of yours. It does not always have to be a property whatever they take goes according to the promissory note and what you promised in case you couldn’t repay the loan.
They are a lot of close-ended loans like residential loans, Student loans, agricultural loans, land loans, property loans, etc. when looking for a loan to benefit yourselves these are the two things you should never forget. A low-interest rate with a long closing time. When you have a long closing time with low-interest rates it’s easier for you to repay your loans, if you have a high-interest rate or a short closing time it might be a little difficult for you to meet the closing day with the total repayment.
If you take a commercial loan you might end up earning something from the commercial property, if you take a land loan it is the same, but for residential loans, you need to look into these two points thoroughly and proceed, because the only way you are going to repay the loan is by your income. One another thing you need to check a hundred times is whether the organization you are borrowing from is credible.