A personal loan

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.
 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
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:
 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
 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
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
** 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
 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.