In simple terms, a loan is a borrowing of funds by one or more people, companies, institutions or other entities to another people, companies, institutions etc. The borrower is then liable to repay the loan principle plus interest before it is finally paid off and to repay the outstanding balance owed on that particular debt. In most cases, loans are secured by some form of collateral, such as a car, home, stock etc. Most loans are unsecured and are generally made for shorter terms. For instance, a business may take out a loan for a fixed term, say 30 years.
Normally, the terms of a loan are outlined and agreed upon between the lender and the borrower. Usually, the term loan is for a period not exceeding twenty years. A repayment schedule is also agreed upon. This repayment schedule is used to ensure that the principal amount is not exhausted during that certain period. In the case of a secured loan, the lender will use the property as security for the loan.
However, unsecured loans do not require collateral. The only thing that the lender requires of the borrower is their credit score. If the borrower’s credit score is below the minimum score required for qualifying, he or she will have to pay a higher rate of interest and the amount of principal amount extended will also be less than the usual rate. Hence, it is important to keep a track of your credit score if you want to avail of this facility.
There are various types of loans available, each having their own benefits and drawbacks. The two most common types of loans are secured and unsecured ones. Secured ones require no collateral to be pledged by the borrower. The lender expects the borrower to return the loan on time with interest and the principal amount. However, this type of loan does not require monthly payment or else he or she can lose his or her property.
The best choice for a secured loan is the gold loan. The gold loan works like a secured loan in many ways. The first benefit of this kind of loan is that the borrower can access larger amounts as compared to the smaller secured loans. The second benefit is that since you are putting up your precious asset as collateral, the interest rates charged are quite low and the loan amount is easily approved.
Since the rates are high in the case of a secured loan, the interest rates and the loan principal amount are also high in case of an unsecured option. A borrower should therefore calculate the monthly repayment amount and the loan principal amount before taking a decision. If the latter is high than the former, then the best choice is to go for a secured option. Else, if the former is higher than the latter, then the best option is to go for an unsecured option.