A guide to loans

A guide to loans

In basic terms, a loan can be defined as a financial debt that a borrower owes to a lender. This guide to loans provides general 
information on the available types of loans, the methods with which loans can be repaid and the formula that one can use to 
calculate interest on a loan.

Loan Types

The two most common types of loans are unsecured loans and secured loans. The difference between these types of loan is that 
unsecured loans do not require that a borrower pledge an asset against the loan, while secured loans are pledged against an asset. 
Examples of assets include an owned home or automobile. When connected to a secured loan, an asset is known as collateral, which can 
be repossessed by the lender if the borrower defaults on the loan.

Unsecured loans typically involve higher interest rates than secured loans. Unsecured loan types include lines of credit, bank o
verdraft loans and personal loans. Secured loan types include mortgage loans and auto loans.

Other less common loan types are also available to borrowers. Demand loans have a variable interest rate, do not need to be 
repaid on a fixed schedule and are short-term in nature, often not exceeding 180 days. Subsidized loans have no interest or low 
interest, provided that the borrower is meeting the conditions to receive a subsidy. For example, a college student is eligible 
for an interest-free subsidized education loan as long as they are currently enrolled in school.

Loan Repayment Methods

Depending on their individual circumstances and preferences, borrowers can explore several different methods for repaying a loan. 
Examples of loan repayment methods include:

Equated Monthly Installments, or EMI, is structured so that a fixed amount of money is paid at monthly intervals for a fixed 
amount of time, such as 15 years or 30 years. This repayment method, which is the most common, involves borrowers repaying both 
the principal and interest on a loan.

Increasing EMI is a flexible repayment method that begins with small monthly installments and increases to higher installments 
as more money becomes available to the borrower.

Balloon Repayment, another flexible method, can be risky for borrowers whose income does not significantly increase over time. 
This type of loan repayment schedule involves small initial installments that "balloon" to high installments after a set period 
of time lapses.

Step Up Repayment is similar to Balloon Repayment, except that the installment increases are more gradual in nature, occurring 
from month to month or from year to year.

Step Down Repayment is the reverse of Step Up Repayment, involving high initial payments that steadily decrease. Borrowers who 
are close to retiring from their careers can benefit from this loan repayment method.

Onetime Repayment is an option for borrowers who can pay off the loan in one lump sum within a set period of time. This is an 
uncommon loan repayment method, as many lenders are hesitant to offer this.

Calculating Interest

A simple method of calculating the total interest on a loan is to multiply these three numbers together:

the principal, or the amount of money borrowed from the lender

the periodic interest rate (the yearly interest rate divided by 100)

the number of years involved in the loan repayment

Borrowers can easily calculate this amount by using one of the many loans calculator programs that are available online.

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