Loan Definition, Types & Process Complete Guide 2023

Loan is a type of money which is taken by some person or other institution which has to be repaid by that person during certain time interval. And for the days the amount is kept, its interest also has to be paid. 

Now the question also comes that after all, who gives us loan?

So you should know that the lender is usually a corporation, financial institution or government which also includes the bank. In this process the lender advances an amount to the borrower.

And in exchange for that amount, the Borrower agrees to repay any finance charges, interest, etc., along with a repayment date and other terms.

If you want, you can also take small or big credit to buy a house or vehicle, you can also consider from any bank or online institution.

For this, first you have to understand how does it works?

For your convenience, let me tell you in advance that term loan refers to a credit vehicle in which money is lent to another party in return for future repayment of principal amount goes.

And the lender also adds interest or finance charges for the number of nights of interest has been granted in addition to the principal value, which the borrower has to pay the interest amount in addition to the principal amount.

The lender does not give the same interest percentage to anyone, it varies are person’s credit/ civil scores.

It first considers the borrower’s income, credit score and debt levels. And if the lender feels that the borrower is reluctant to give the loans, then in that case it can charge higher interest rates from risky borrowers.

Loan Definition & Works

Simply put, a loan involves a lender lending the borrower some amount (often monthly) which involves the borrower making regular (often monthly) payments until the lender is fully repaid.

Not only the amount of principal, in addition to the principal, interest has to be paid at a fixed rate as well as the lender’s fee. 

The Loan Process

Whenever a particular person needs money, that person applies from any bank, corporation, government or any other institution of government or private.

After applying, the borrower is asked to provide a kind of specific details that on what basis the loan should be given to you and for which purpose you are taking?

For example, the reason, person’s financial history, social security number (SSN), and other information are all asked to submit their papers.

The lender reviews a person’s source of income including the DTI ratio to see if that person will be able to pay off the loans in the future. If you want to know more then you are requested to check here

Based on the same paper of the applicant, the lender either accepts the application or if there is some error in the paper then the lender can also reject the paper.

But in case the lender rejects the application, it has to give a reason for the rejection. If the application is approved, both the lender and the borrower have to sign a contract.

Components of a Loan

Some of components are as follows: 

  • Principal: Principal is the amount of money that is borrowed. And on the same principal amount, the lenders charge interest.
  • Loan Term: The loans tenure is the time period within which the borrower has to repay the full amount.
  • Interest Rate: The rate of interest is the rate at which the rate of interest on the principal amount is increased or increased. The principal amount increases at the same rate of interest.
  • Loan Payments: The loan payment amount is the amount that is to be paid every month or week to meet the terms.
  • Loan Principal: Loan principal is the amount of money that the borrower agrees to pay back to the lending company under an agreement at the time of taking the credit.
  • Loan Term: This term is also often referred to as the loan tenure. The fixed time for which the credit is given to a borrower is called the loan tenure. The borrower has to repay the credited amount with full interest within the same period.

Types of Loans

There are many different types however there are a variety of factors that can make a difference in their contractual terms as well as the costs associated with them.

But in general, there are only two types- Secured Loans & Unsecured Loans.

If you pledge any of your valuable assets at the time of taking then such type is called a secured loans and vice versa, if you take without mortgaging it, then it comes under unsecured loans. Further in this article, we will also read both in detail. 

Secured Loans and Unsecured Loans

Now let us understand about secured and unsecured loans in details. Mind that you took it from a bank to buy a car.

If you somehow default in giving the credit amount taken, the bank (from where you have taken it) takes back the car from you in lieu of the amount and also deposits the remaining amount due on you. So you understood how this was secured here.

Here the pay loans is secured because the bank took your car from you as soon as you decided to pay the money.

This means that the bank took your property in the form of your car. The bank has already been told that you are taking a car with this amount, so if you do not dose then the bank will take the car from you and the number of days for which you have kept the amount with you, that too interest Including will charge you.

Now coming to the unsecured loans, it is generally seen that it carry higher interest rates than secured.

Know why such high interest is charged on unsecured, because whenever a person takes an unsecured credit from any bank or any other institution, then he takes it only on the basis of his paper.

If that person defaulted for some reason, then the bank’s loan amount got sunk. You can keep a home or a vehicle loans as an example of a secured ones.

You probably know this or you might have even heard that home and car loans are so cheap.

Why are home and car loans cheaper and why are the interest rates so low on this home and car loans. You must have understood this very well now because these are secured, that is why.

Examples of unsecured are credit card, student loans or personal loans are available at much higher interest rates than secured.

Have you ever wondered why credit card, student or personal loans are available at such high interest rates.

This is because in this type of loans, you do not keep any kind of things in the bank as a pledge.

Now you must have understood this very well because these are unsecured and available at very high rate of interest.


So friends, in this article we told you about loan, its types & components? If you still have any question in your mind related to this, then feel free to ask me through comments. And finally, how did you like this article, let me know through the comment. Thank you!

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