There are two types of broad loan categories that encompass a variety of borrowing options based on the loan installment's concept that you can avail:
Secured Loans
Banks and financial institutions offer loans that are protected by collateral. Any purchase requiring a large sum of money, for example, to buy a property, usually falls under this category of loans. When you take a mortgage loan to buy a property the financial entity that lends you the money will hold the title deed of the property as collateral until such time that the loan installments are completely paid off. Stocks, Bonds, CDs and property can be used as collateral to secure a loan. Interest rates tend to be more favorable to secured loans due to the lien on collateral, held by the lender. You need to be aware that failure to repay the loan gives the lender the right to dispose of the collateral to recover the loan amount.
Unsecured Loans
These loans are sometimes referred to as signature loans and can be obtained without any collateral. Personal loans, education loans, credit card loans and private loans against an I.O.U. fall under this category. Banks, financial institutions and credit card companies offer these loans on the assumption that the borrower intends to repay the amount. The borrower signs an agreement with the lending entity to the effect that the loan installments will be paid and the entire commitment honored. In the event of default on payment, the lender’s only recourse will be the claim's court. Additional interest and late payment fees will accrue to the outstanding amount and legal proceedings taken against the borrower. As the risk to the lender is much higher with unsecured loans, the interest rates tend to be higher.
Advantages of the loan installment's system:
• Interest is fixed for the duration of the loan period and this helps the borrower budget appropriately to make the repayments on a monthly basis. There is no threat of a hike in interest rates at any time during the repayment period.
• Loan installments are usually spread over a long time period: mortgage loans are 15-30 years, personal loans and car loans for periods lasting up to 5 years and so on. This is beneficial to the borrower because the longer the repayment term, the smaller the monthly installment amount.
• There is a degree of flexibility that allows you to pay off the loan installments in one amount before the actual loan repayment period ends. Some companies do not penalize you with foreclosure charges for early repayment.
