In the financial world, a loan is defined as a borrowing of monies by one or more persons, companies, institutions, or other entity to another persons, companies etc. The borrower is then obligated to repay principal amount borrowed and also interest on that loan until it is paid off completely. Most of the loans that we hear about are for home purchase or business start up. These loans are extended by a lender to a person or institution on the basis of certain assets which have been put up as collateral. Common home/business loans include the home mortgage loan, commercial mortgage loan, auto loan, personal loan, and the student loan.
Home Loan: A home loan can be taken for any purpose like home renovation, repayment of medical bills, and for any expense which requires a lot of cash. Lenders prefer availing secured loans because they do not risk losing their property on the unsecured loan. However, borrowers also need to provide security to the lenders by offering assets like home, stock, real estate etc as security. Some loans are even made unsecured.
Commercial Mortgage Loan: This loan can be used by any organization or businessman to purchase land property. This kind of loan comes with the backing of some type of asset. Banks, financial institutions, credit unions, and other financial institutions provide such loans. To avail such a loan a borrower has to pledge collateral. Common assets that are pledged are motor vehicles, business securities, and even jewelry. If in case the borrower fails to return the loan amount, the lenders can take possession of these assets.
Student Loan: For students seeking higher education, no financial institutions will refuse to issue them a loan. Students can borrow money for studying from these loans. They will have to return the loan in couple of years. On meeting the repayment conditions, the parents or guardians can add the borrower as an additional borrower on their credit score and thus can borrow home loans with better interest rates.
Home Value Survey: If there is a change in the home value or price, the value of the home remains same as it was previously. It may be required to take a survey that would asses the current home value. The loan taker who takes up the survey must pay for the amount to the lender and also need to get the report on his credit score. The survey gives a true picture of the home value and hence it plays a key role in approval of home loans.
Credit Card: Sometimes when shopping for something expensive like a car, home appliances, etc, the loan providers ask you to put your collateral in the form of secured loans. You need to keep all your valuables like savings accounts, stocks etc with the lender. However, if you fail to return the loan amount then the lender can take over the security and sell the same to get back the loaned amount. These are some of the few reasons why loans are taken by the people for specific purposes and not all of them are approved.