What is a Loan?
What is a Loan? – Definition, Types, Advantages & Disadvantages
What is a Loan? – Definition, Types, Advantages & Disadvantages
A=loan==is=when=you=receive=money=from=a=friend,=bank,=or=financial=institution=in=exchange=for=future=repayment=of=the=principal
and=interest.=Learn=more=about=different=types=of=loans-and=consider=the=advantages=and=disadvantages-of-loans.-Updated:-02/02/2022
What-is-a-Loan?
If-you-have-never-received-a-loan-topurchase-something,-you-are-certainly-in-the-minority!-Loans-can-be-a-great-thing,
but-they-can-also-get-you-into-trouble.One-of-the-keys-to-being-financially-successful-is-understanding-when-loans-are-a
good-solution-for-your-situation.-Loans-are-never-a-good-idea-if-you-can’t-afford-to-pay-them-back-in-the-required-time-frame.
Let’s-explore-what-a-loan-is-and-find-out-some-of-the-common-ways-tob-orrow-oney.
A-loan-is-when-you-receive=money-from-a-friend,-bank-or-financial-institution-in-exchange-for-future-repayment-of-the-principal,
plus-interest.-The-principal-is-the-amount-you-borrowed,-and the-interest-is-the-amount-charged-for-receiving-the-loan.
Since-lenders-are-taking-a-risk-that-you-may-not-repay-the-loan,-they-have-to-offset-that-risk-by-charging-a-fee – known-as-interest.
Loans-typically-are-secured-or-unsecured.-A-secured-loan-involves-pledging-an-asset-(such-as-a-car,
boat-or-house)-as-collateral-for-the-loan.-If-the-borrower-defaults,-or-doesn’t-pay-back-the-loan,-the-lender-takes-possession-of
the-asset.-An-unsecured-loan-option-is-preferred,-but-not-as-common.-If-the-borrower-doesn’t-pay-back-the-unsecured-loan,-the
lender-doesn’t-have-the-right-to-take-anything-in-return.
Types of Loans
Personal-loans-You-can-get-these-loans-at-almost-any-bank.-The-good-news-is0-that-you-can-usually-spend-the-money-however-you-like.
You-might-go-on-vacation,-buy-a-jet-ski-or-get-a-new-television.-Personal-loans-are-often-unsecured-and-fairly-easy-to-get
if-you-have-average-credit-history.-The-downside-is-that-they-are-usually-for-small-amounts,-typically-not-going-over-$5,000,
and-the-interest-rates-are-higher-than-secured-loans.
Cash-advances—If-you-are-in-a-pinch-and-need-money-quickly,-cash-advances-from-your-credit-card-company-or-other-payday-loan
institutions-are-an-option.-These-loans-are-easy-to-get,-but-can-have-extremely-high-interest-rates.
They-usually-are-only-for-small-amounts:-typically-$1,000-or-less.-These-loans-should-really-only-be-considered-when-there-are-no
other-alternative-ways-to-get-money.
Student-loans – These-are-great-ways-to-help-finance-a-college-education.-The-most-common-loans-are-Stafford-loans-and-Perkins-loans.
The-interest-rates-are-very-reasonable,-and-you-usually-don’t-have-to-pay-the-loans-back-while-you-are-a-full-time-college-student.
The-downside-is-that-these-loans-can-add-up-to-well-over-$100,000-in-the-course-of-four,-six-or-eight-years,-leaving-new-graduates
with-huge-debts-as-they-embark-on-their-new-careers.
Mortgage-loans – This-is-most-likely-the-biggest-loan-you-will-ever-get!-If-you-are-looking-to-purchase-your-first-home-or
some-form-of-real-estate,-this-is-likely-the-best-option.-These-loans-are-secured-by-the-house-or-property-you-are-buying.
That-means-if-you-don’t-make-your-payments-in-a-timely-manner,-the-bank-or-lender-can-take-your-house-or-property-back!
Mortgages-help-people-get-into-homes-that-would-otherwise-take-years-to-save-for.-They-are-often-structured-in 10-,
15-or-30-year-terms,-and-the-interest-you-pay-is-tax-deductible-and-fairly-low-compared-to-other-loans.
Home-equity-loans-and-lines-of-credit – Homeowners-can-borrow-against-equity-they-have-in-their-house-with-these-types-of-loans.
The-equity-or-loan-amount-would-be-the-difference-between-the-appraised-value-of-your-home-and-the-amount-you-still-owe-on
your-mortgage.-These-loans-are-good-for-home-additions,-home-improvements-or-debt-consolidation.-The-interest-rate-is-often
tax-deductible-and-also-fairly-low-compared-to-other-loans.
Small-business-loans – Your-local-banks-usually-offer-these-loans-to-people-looking-to-start-a-business.-They-do-require-a
little-more-work-than-normal-and-often-require-a-business-plan-to-show-the-validity-of-what-you-are-doing.-These-are-often
secured-loans,-so-you-will-have-to-pledge-some-personal-assets-as-collateral-in-case-the-business-fails.
Advantages of Loans
Business-growth-and-expansion-Loans-are-a-great-way-for-a-business-to-expand-and-grow-quicker-than-it-otherwise-could.
Access-to-additional-money-helps-businesses-hire-more-employees,-buy-inventory-and-invest-in-needed-machinery.