August 24, 2012

How to choose the best loan

A loan is an amount borrowed to fulfill your financial needs in times of financial crisis. You can borrow an amount from the lender in terms of debt which you have to repay within a specific period of time known as maturity period with some interest. The amount taken by the borrower is called the ‘principal’ and the amount that you have to repay after the addition of interest is called a ‘loan amount’. Various kinds of loan are present on the market and you have to select appropriately based on your needs and financial status. It’s really a hectic job to select the best and most appropriate one from such a vast variety, to make sure you opt for best loan you need to understand and learn about each of them.

The different kinds of loan are:

Secured loans:
In these loans the borrower has to provide some security to the lender against the loan amount. Generally, a valuable asset with an equal or greater value than the loan amount is used as the security; the asset used as security is known as ‘collateral’. It involves less risk for the lenders as the loan amount is secured against the asset and if the borrower fails to repay the loan amount within the maturity period then the lender have the right to possess and sell the asset to get back the money. Some of the more commonly known secured loans are mortgage loans and care loans.

Unsecured loans:
These loans don’t involve any collateral as the security against the loan amount because of which the borrower faces less risk and doesn’t lose much in the event of non-repayment. These are small cash loans for a short maturity period usually your pay day. These are beneficial to tackle unexpected and unfortunate events that require immediate finances. Commonly used unsecured loans are payday loans.

Balloon loans:
These loans involve a much smaller amount of installment by the borrower which results in huge unpaid balance amounts at the end of the maturity period which the borrower has to pay off at once after the loan expires.

Constant rate loans:
These loans have a constant rate of interest and installment amount. Non-uniform market interest rates don’t affect these rates.

Adjustable rate loans:
For these loans the rate of interest changes based on the fluctuation of market interest rate, if the rate of interest increases in the market the borrower has to increase the rate and vice-versa.

Hybrid loans:
These loans act as both constant and adjustable rate loans. Over a specific time period on which the lender and borrower agree on an interest rate, which remains constant and after that interest rate depends on the fluctuation on the market.

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