What are Financial Loans?
The lending of money from an individual, organization, financial institution to another entity or individual is a business activity referred to as a financial loan. Financial loans always come with a cost and this is usually referred to as the interest. The interest is in fact the incentive for a lender to provide a loan to a borrower. Proof of a financial loan is usually a written contract with loan conditions signed by both the borrower and the lender. The loan contract sometimes comes in the form of promissory note indicating the principal amount, the interest rate, and the mode of how the loan is to be paid. In a contracted loan, there are obligations and restrictions enforced by the loan contract where the borrower is placed under restrictions referred to as loan covenants. Business loans and other kinds of loan are provided by financial entities and more often than not by banking institutions. Type of loans available in the market today is Secured, Unsecured, Demand, Subsidized and Concessional loans. The general target markets for these loans are categorized into two namely, personal and commercial.
A secured loan is where a borrower pledges some kind of valuable asset like a car and/or other properties. The secured assets are called collaterals. A mortgage loan is one of the most common types of secured loan and this type normally falls under the category of personal loans. These are usually availed by private individuals to enable them to purchase items or things such as a car and/or house and lots. When a bank or other financial institutions provide a mortgage loan, they (the bank) are given security in the form of a “lien” (encumbrance) on the title of the property. This simply means that in the event the borrower fails to pay the full amount of the loan, the mortgaged property or properties will be turned over to the lender to be auctioned off or sell to recover the amount the lender has provided.
Unsecured loans on the other are never secured against any of the borrower’s asset and are usually provided by financial institutions (mostly banks) and comes in the form of a Credit Card, Personal loans usually referred to as character loan, bank overdrafts, credit lines, corporate bonds, and peer-to-peer lending. More often than not the interest rates for unsecured loans are much higher than those of secured loans.
Demand loans are short term loans and have no repayment fixed date and have floating interest rate. More importantly they can be called in for repayment at any given time. Subsidized loans incur very minimal interest because the same is reduced by an explicit or hidden subsidy. A good example is a student loan where the loan remains in effect as long as the student remains enrolled in education. Concessional loan or “soft loan” are the most generous of all loans because they have the least interest rates and the grace periods provided are a lot more flexible. The best examples are loans provided by international banks (like the World Bank) to developing countries. Another is loans offered by companies to their employees as a form of an employment benefit.