Definition of Loan
Loan is a simple concept which means lending money from another individual, bank or organization.
It is kind of debt on which interest is applicable, it has a written evidence note and usually paid back on set defined time, either lump sum or in installments.
Brief Explanation of Loan
Debt loan has three main elements; principal amount, interest amount and the repayment date.
- Principal amount is the actual amount borrowed.
- The cost of loan or debt is referred to as interest.
There are two types of loans.
- Secured loans
- Unsecured loans
Secured Loans: This is the one in which borrower offers some security in the form of any asset i.e. car, property or gold etc.
Mortgage is one common example of secured loan. In this bank or financial institution lends money to the borrower but the title of the property remains with the lender till the loan is completely paid off.
Unsecured Loans: Unsecured loans are the ones with no security cover.
Example of unsecured loans include credit card loans, banks loans , individual to individual loans etc.
Interest on unsecured loans vary from the parties will to another.
- Interest on loan and debt is a financial Statement item and is deducted to reach the net profit of the company.
- Interest on loan is also a tax-deductible amount.
- Loans are easily available on flexible amount.
- It is easy to calculate and arrange.
- One major drawback of debt loan is that it has to be paid on the stated given time else penalty applies.
Other different types of loans include;
- Student loan, Personal loan ,Commercial loan
- Mortgage loan
- Auto loan
- Business loan
- Conventional loan