what is a Loan ?
what is a loan? In Simple terms loan is a borrowed thing which someone owes money with interest rate to pay back on the periodical basis like monthly, quarterly or yearly.
In other words, Loan is an amount which a lender gives to the borrower with some interest rate and borrower payback on an installment basis. For example, suppose a person name ‘A’ wants to take 5000$ from a bank name ‘B’ here If ‘B’ gives 5000$ to ‘A’ then 5000$ will become A Loan amount.
Here Mr.A will pay 5000$ to Mr.B on some periodical basis like either monthly, quarterly or yearly basis, It means Mr.A will refund 5000$ on an installment basis. If we try to know more about how Mr.A will pay the loan amount in which way by paying also interest to Mr.B.Then here I have explained in my previous article specifically how the loan Interest rate and Installment are being calculated
Loan Amount is also otherwise called a Principle. All the Installments or EMI are calculated through Principle amount.
What is a Loan in History
The history of banking started from an ancient time where prototype bank were the merchants who gave the loan to farmers and traders who carried goods between cities. It started around 2000 BC in India Assyria and Sumeria.Source-Wikipedia
From the beginning civilization era, the loan has been becoming a strong contribution to the country’s development. Let’s know how Loan started at the time of the initial era of the world.
Some historical facts of Loan
- According to the source, It was claimed that 1st loan was started in
Mesopotamia in 2000 BCE. Here Farmer needs harvest plantation for their grain production for the reason that they needed Seed as a loan for later repayment. This was the beginning of time where the Loan system brought into the world
- Second when an era of loan Interest was begun with a loan. It was in 1754 BCE and reports from the Code of Hammurabi which is a clay table longest and oldest preserved piece of writing content that Interest on silver was paid.
- In 1754 BCE, unlike grain or animal, silver couldn’t generate decent value against the loan. So Authority of King decided to add interest on a loan of silver.
- First Vilification of lending in 1400 AD when the Qur’an and the Christian Bible banned Usury. Torah who permitted to give a loan to only jews and only charge interest to non-jews.
- This restriction created the rise of the money-lending class. In Italy and other countries, Jews couldn’t hold land so they entered into the marketplace of lending money.
- they also used holding court on benches(known as “Bancas” or
“Banques”) is now also called a bank.
- In 1800 AD a new era of lending came when Philadelphia Savings Fund Society started a loan in America. In the USA, common people can get advance cash support.
- US Congress started to give housing finance against residential property in 1932.
These are all the historical facts when loans started from ancient times to the present time.
Types of loan and their feature
we are all dealing with debt any person in the world would definitely need money so that he needs a loan. Present era like 2019, the way of taking a loan may not be the same there is so different loan type.
Let’s discuss types of loan
1-Secured Loan & 2-Unsecured Loan here we can also understand through this Infographic
It is loan where Lender gives loan to borrower with collateral some assets of borrower.It means If Borrower takes loan and fails to repayment then Lender have legal right to take collateral assets of borrower.
It is a secured for a lender without any risk to lend the money to borrower.
Types of secured Loan
- Vehicle finance
- Home financing
- CD or Saving Loan
- Pawn broker loan
In this 21st century era, we all need the vehicle to satisfy day to day requirement and vehicle is the only resource which makes trading possible from one place to another. So that country’s economy also depends upon the vehicle.
After realizing the necessity of vehicle resource 1st vehicle loan came into the market in 1919 by General Motors Acceptance Corporation(GMAC).
2nd Vehicle Loan started in 1923 by Ford Motor Credit Company It was just booming time of vehicle finance.
All most all types of vehicle are being financed all over the world like from 2 wheeler to 12 wheeler vehicle.Vehicle like Motorcycle,,car,autoriksa,commercial vehicle,etc all are available for finance.
When A person takes Money as assistance from financial institute or bank for constructing a home in repayment basis known as home loan.
This is biggest secured asset loan as compared to other types of loan.There are various types of home loan which bank or NBFC(Non banking Financial Institution) are providing to customer such as
- land loan
- Construction finance
- extension Loan
- Home Improvement finance
- Loan balance transfer
- Composite home loan
CD & Saving Loan
CD or certificate of deposit is a certificate which is issued by the bank for a specified time period with specified interest rate and some banks are providing loan against the certificate of deposit with a lower interest rate as compared to an unsecured loan.
Saving deposit loan is another securedloan type where Banks are providing loan against saving deposit of account holder.
The pawnbroker is an Individual or business who provides a secured loans to people against personal property assets used as collateral. Personal property may include the computer, musical instrument, television, video games system, cameras and etc used as collateral.
Unsecured Loan is a loan where banks/NBFC provides loan to a customer without any collateral of a customer.
It means If Lender gives a loan to borrower suppose borrower can’t repay the money, the lender doesn’t have legal rights to collect assets from the borrower.
It is also called as a signature loan because borrower’s signature is written on the agreement is all that borrower bring to the table. Here borrower promise to repay the amount to a lender.
. Types of Unsecured Loan
- Personal loan
- credit card
- student loan
- payday loan
It is a loan which is given to a person for personal use at a higher rate of interest by Bank/NBFCs. It is otherwise called as an unsecured loan where the lender doesn’t have a legal right to acquire any asset for default payment.
The criteria for accessibility of personal loan depends on age, residence place, income source, capacity to repay and credit score. The personal loan has a tenure period ranging between 12 months to 36 months.
credit card loan
A loan against the card and It will work like personal loan, anyone can use it for making the transaction of goods and services. It has a credit line limit on which the cardholder can use it to buy goods and services.
Credit card charged interest, annual fees, late payment charges and usually it will charge higher interest rate if a customer delays to repay the money.
The purpose of giving a loan to assist the educational costs and admission fees of the student is knowns as a student loan. Usally various banks and NBFCs support to provide students loan which helps the student to carry out the financial needs of universities and college.
In the case of student loan, The loan will be reimbursed after finishing college or university.
What are payday loans ? Payday loan is a small, short term and theunsecured loan where a borrower takes a loan and repays it after getting next wages or salary.
Normally the tenure period is in between 2 to 3 week period time. At the time of due date, the borrower will repay the entire single amount including charges.
In conclusion,I will explain that Loan has given us new platform to grow with financial stability and desire to accomplish goal.