Tuesday, January 17, 2012

Bank Loans

A loan is a type of debt. In a loan, the borrower (customer) initially receives or borrows an amount of money, called the principal, from the lender (bank), and is obligated to pay back or repay an equal amount of money to the lender (bank) at a later time. Typically, the money is paid back in regular installments (Eg.Monthly), or partial repayments; in an annuity, each installment is the same amount.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender (bank) to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants
We can broadly classify loans into two major categories.
Secured Loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) called as collateral security. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. Similar concept is applicable for auto loan, gold loan etc.
Unsecured Loan:
Unsecured loans are monetary loans that are not secured against the borrower's (customers )assets. This means no collateral security provided by the customer. These may be available from financial institutions (banks) under many different guises or marketing packages:
credit card debt
personal loans (This also can be secured loan eg: against property, gold etc)
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
The interest rates applicable to these different forms may vary depending on the lender and the borrower.
Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default (Not paying back) are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.
You can further classify the loans as Home loans, educational loans, Car Loan, Two Wheeler loan, Personal Loans, Agricultural Loans, Business Loans and so on.


  1. thanks a lot...can u post what are the rates fixed by rbi and bank...by siva rk

  2. Hey Thanks for sharing this informative blog, i was looking for same kind of content about Home Loan Transfer