1) What is a loan? The act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges. Or An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. 2) Why do we need loans? Business perspective: They are a way to grow the overall money supply in an economy as well as open up competition, introduce new products and expand business operations. Loans are a primary source of revenue for many financial institutions such as banks, as well as some retailers through the use of credit facilities. 3) Who and why gives loans? Where to get a loan, application for a loan? Loans can come from individuals, corporations, financial institutions and governments. 4) Interest rate of a loan? Total cost of a loan? The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the "lease rate". The total cost of a loan is the actual money you borrow plus all of the interest you will pay. Be sure the reason you are taking the loan is important enough to warrant the extra money you will pay in interest. 1. Open-ended loan, examples: Credit cards and other revolving credit accounts are considered open-ended. They have varying balances and can be used multiple times. While their payment due dates might be regular, the amount due can vary based on the balance of the account. Home equity lines of credit are considered open-ended loans, though they are secured by the value of your home and thus may carry a lower general interest rate. 2. Close-ended loan, examples: wrapped and packaged with a definitive balance, term and payment amount. They are generally used to secure big-ticket items such as vehicles and homes, and often have interest rates that are more favorable than those of open-ended loans. 3. Secured (collateralized) loan: Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien is placed on such item. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well. Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans. As the term implies, a secured loan means you are providing "security" that your loan will be repaid according to the agreed terms and conditions. It's important to remember, if you are unable to repay a secured loan, the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan. 3. Secured (collateralized) loan: (continued) Secured loans are usually the best (and only) way to obtain large amounts of money. A lender is not likely to loan a large amount with assurance that the money will be repaid. Putting your home or other property on the line is a fairly safe guarantee that you will do everything in your power to repay the loan. Secured loans are not just for new purchases either. Secured loans can also be home equity loans or home equity lines of credit. Such loans are based on the amount of home equity, which is simply the current market value of your home minus the amount still owed. Your home is used as collateral and failure to make timely payments could result in losing your home. Examples of Secured Loans: Mortgage Home Equity Line of Credit Auto Loan (New and Used) Boat Loan Recreational Vehicle Loan 4. Unsecured (uncollateralized) loan: Unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or personal (signature) loans. Lenders take more of a risk by making such a loan, with no property or assets to recover in case of default, which is why the interest rates are considerably higher. If you have been turned down for unsecured credit, you may still be able to obtain secured loans, as long as you have something of value or if the purchase you wish to make can be used as collateral. 4. Unsecured (uncollateralized) loan (continued) Examples of Unsecured Loans: Credit Cards Personal (Signature) Loans Personal Lines of Credit Student Loans (note that tax returns can be garnished to repay delinquent student loans) Some Home Improvement Loans When you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. You will be judged based on the five (5) C's of credit - character, capacity, capital, collateral, and conditions – these are all criteria used to assess a borrower's creditworthiness. Character, capacity, capital, and collateral refer to the borrower's willingness and ability to repay the debt. Conditions include the borrower's situation as well as general economic factors. 5. Conventional loans: Loans not guaranteed or insured by any government program are known as conventional loans. These loans adhere to Fannie Mae guidelines. Fannie Mae, or Federal National Mortgage Association, is a corporation created by the federal government that buys and sells conventional mortgages. It sets the maximum loan amount and requirements for borrowers. Usually, a conventional loan is a 30-year fixed rate mortgage. That means it has a fixed interest rate for the 30 year term of the loan. Conventional loans also typically require at least a 20 percent down payment. For example, if a house costs $200,000, the lender will provide a loan for 80 percent of that amount. So, $160,00 is financed through the lender and the borrower must pay $40,000 cash. Conventional loans can have better interest rates than nonconventional loans and can be a great option for those with a 20 percent down payment. However, even if the borrower does not have a 20 percent down payment, it is still possible to get a mortgage. By putting less down and accepting a possibly higher interest rate, the borrower can still get financing through a non-conventional loan. 6. Payday loans: A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash. The lender holds onto the check and cashes it on the agreed upon date, usually the borrower's next payday. These loans are also called cash advance loans or check advance loans. 6. Payday loans: (continues) Although The Federal Truth in Lending Act requires payday lenders to disclose their finance charges, these establishments have gotten a bad reputation for their predatory lending practices. Most borrowers using payday loans have bad credit and low incomes. They may not have access to credit cards and are forced to use the service of a payday loan company. Even if the borrower feels the fee may be fair ($17.50 per $100 for seven days), that translates into a rate of more than 900% on an annualized basis. Most loans are for 30 days or less and can be rolled over for additional finance charges. Loan amounts are usually from $100 to $1,500. 7. Advance-fee loans: According to law enforcement agencies in the U.S. and Canada, ads and promotions for advance-fee loans suggest — or even “guarantee” — that there’s a high likelihood that a loan will be approved, regardless of the applicant’s credit history. But to take advantage of the offer, the consumer has to pay a fee. The catch? The scam artist takes off with your fee, and the loan never materializes. Many advance-fee loans are promoted in the classified sections of daily and weekly newspapers and magazines. Often, the ads feature toll-free 800, 866, or 877 numbers. The loans also are promoted through direct mail, radio, and cable TV spots. The fact that an ad is in a legitimate media outlet — like the local newspaper or radio station — doesn’t guarantee that the company placing it is trustworthy. 8. Co-signed loans: The act of signing for another person's debt which involves a legal obligation made by the cosigner to make payment on the other person's debt should that person default. Having a cosigner is way for individuals with a low income or poor/limited credit history to obtain financing. II. 1. Credit cards: A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating. 2. Student loans, types, when do you start paying them? A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. ***** 3. Real estate loans, i.e., mortgages: Real estate loan - a loan on real estate that is usually secured by a mortgage. A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose. 4. Cash loans: A cash loan is a short-term loan product that is also commonly referred to as a cash advance loan, or a payday loan. ** A cash advance is a cash loan from a credit card, using an ATM, a bank withdrawal or "convenience" checks. Credit card cash advances have many disadvantages for consumers. Generally, you cannot take a cash advance for the full amount of your available credit. The interest rate on cash advances is often significantly higher than it is on purchases or balance transfers. A transaction fee, which is a percentage of the cash advance, is usually charged. There is typically no grace period for cash advances. 5. Car loans: Car loan - a personal loan to purchase an automobile. (auto loan, automobile loan). Consumer loan or personal loan - a loan that establishes consumer credit that is granted for personal use; usually unsecured and based on the borrower's integrity and ability to pay. 6. Personal loans: A personal loan is an unsecured loan, meaning the borrower does not put up any collateral or security to guarantee the repayment of the loan. For this reason, personal loans tend to carry high interest rates. A personal loan may be the only option for people who have established little credit, or for those who don’t own a house, real estate, or other assets to use as collateral. A personal loan may be a sensible alternative to financing a major expense with credit cards, which may charge even higher interest. Personal loans can also be used to consolidate debt. If the interest rate on the loan is lower than the interest rate on your credit cards, it may make sense to pay off your debt with a personal loan. 7. Installment loans: An installment loan is a loan that is repaid over time with a set number of scheduled payments; normally at least two payments are made towards the loan. The term of loan may be as little as a few months and as long as 30 years. A mortgage, for example, is a type of installment loan. 8. Tax-refund loan: A loan provided by a third party against a taxpayer's expected refund. The tax refund anticipation loan is not provided by the U.S. Treasury or the IRS and is subject to the interest and fees set by the lender. These loans are most often offered by large tax preparation companies to taxpayers expecting refunds of a few thousands dollars or less. 9. Pawnshop loan A business that lends money at high interest rates in exchange for collateral such as jewelry, electronic items, or anything else that is judged to have a resale value. The pawn shop keeps the collateral, and if the loan is repaid, the item is returned. If the money isn’t repaid, the item is sold and the pawn shop keeps the proceeds. Typically pawn shops lend money to people at a lower economic level who don’t have access to other forms of credit, such as credit cards or a credit line from a bank. 10. Predatory lending It is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford.