Financial needs can crop up unannounced and when individuals don’t have enough savings at hand, they seek loans. Loans help give individuals funds required for their financial needs. There are different types of loans available in the market depending on the financial need of individuals. Even if your clients are looking for a loan, there are some things which they should know before they take the loan. Let’s, therefore, demystify loans and their different aspects.
What are loans?
A loan is a sum of money that one party lends to the other. The lender of the loan usually takes the risk of lending the money and thus it charges an interest or finance charge for the same. Loans usually are allowed for a specific time period. However, a few loans do not have any specific time period as well and can be repaid any time. Repayment of the loan is done in the form of EMIs (Equated Monthly Instalments) which consist of both the amount of loan granted and the interest thereof. The lender of a loan can be a bank, financial institution, private lenders or even friends and family.
Types of Loan
Primarily loans are categorized as secured and unsecured loans. Under each of these categories, there are several subcategories and the loans that all of us are very familiar with.
- Secured Loans
Any loan that involves usage of collateral as security is termed as a secured loan. In simple words, in a secured loan the financial institution will hold on to certain assets (house, property, gold, etc.), as declared by your clients, in exchange for providing the loans. The lender usually holds on to these assets till the loan is complete. Should someone default on the loans, the financial institutions will take possession of the asset and might have to sell the same to recover the loan amount. Some common examples of secured loans are:
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- Car Loans
As the name suggests, your clients can take a car loan to buy a car of their choice. It is one of the easier loans to get their hands on, with very minimal documentation and turnaround time for dispatching the loan amount. Your clients will have to repay the loan with EMIs or Equated Monthly Instalments and with options to repay - Home Loans
By applying for a home loan your clients can fulfil their dream of owning a house. Home loans usually have a much higher tenure, up to 20 years and in some cases even 30 years. Clients can use home loans not only for buying new homes but for renovating existing ones, construct a house, extend an existing home, etc. - Business Loans
You can recommend a business loan to any client who is looking for capital or money to expand their business or build a new one. Though, it must be noted that it is a bit difficult to get a loan for started a net new business.
- Car Loans
- Unsecured Loans
Any loan that does not require the attachment of collateral is termed as an unsecured loan. These loans usually are riskier; thus, the tenure of the loans is shorter with higher interest rates.
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- Personal Loans
Any client can take a personal loan for various needs without necessarily having to provide many details about the same. You can take a personal loan for a vacation, buying a home theatre, paying of bills, etc. - Commercials Loans
Financial institutions offer commercial loans for business entities and these must be utilized for business purposes only. Usually, banks and NBFCs or non-banking financial corporations provide such loans.
- Personal Loans
How do loans work?
Before your clients take money from any financial institutions, they must agree to certain terms before the loan amount is disbursed. These terms include the date(s) of repaying the loan, the tenure, the interest rate, attached collateral (if required). As clients pay EMIs, a portion of it goes as interest and remaining to pay off the principal amount.
Things to remember when availing a loan
You can suggest your clients do some research for the loan, look for different loan providers to get a better interest rate, choose a repayment schedule which is easy to maintain, look at conditions of closing the loan ahead of schedule and look for any additional charges.
