Various Types of Loan: Long Term and Short Term Loans, Secured and Unsecured Loans
The meaning of Unsecured Loans
Unsecured loan is something that is not supported by collateral security. These types of loans generally depend upon the borrower's credit rating. This is the reason why such types of loans are difficult to apply for than the regular secured loans. Income of the borrower plays a vital role here. When loan is granted, it is not completely based on the credit achievement of the borrower. It is verified and completely dependent upon the overall goodwill of the borrower in the financial market, like the payment of debts.
Assessment criteria for unsecured loan
We know that unsecured loans are not safeguarded against any asset or property, in case if the borrower fails to comply with the payments on time it becomes very difficult for the lender to get back his money on time. Unsecured loans have high possibility of risk than the secured loan. Particularly, lenders take a note of the borrower's credit history and records and when and how they have cleared and completed the payments on time.
Purpose of Rate of Interest
The rate of interest that is applied to unsecured loans basically depends upon the risk level and total amount of loan. With the increase in loan amount you will find a decrease in rate of interest and higher the risk more high would be the rate.
Loan that is supported by a security is known as a secured loan. If in any case the borrower fails to comply with the loan amount, the lenders may take possession of the asset or property collateral to the loan. Here, there is less chance of risk. The creditor has completely authority over the properly and can at any time sell the property or asset. Secured loan is a reprieve for creditors and mostly there is a financial jeopardy involved in it because it gives authority to the creditors to take the valuable assets when debt is not repaid.
Criteria for Secured Loans
As we all know secured loans are loan granted against collateral security, it becomes easy for the lender to get his money or payment on time. He can cover the payments without any loss. So in case the borrower defaults payment, there is less risk to bear for the lender. Risk level is low in comparison with unsecured loans.
Rate of interest determination
Secured loans are cheaper than unsecured loans. The companies verify the credit score of the borrowers and if the needs and requirement of granting such loans are satisfied then the companies can proceed with the loan. High value collateral and good credit score helps you get a very low interest rate.
Long Term Loans
The loans that are taken for a period of at least three years are termed as long term loans under the definition that is given by the financial bodies. Nevertheless, these types of loans can be for maybe ten or twenty years as well. For any long term loan a guarantee is required. A security is to be given for getting the loan. The security can be a land, a property, any sort of asset etc. the rate of interest plays a vital role in the loan process. The amount of loan, the period that is decided for the repayments of loan, the income of the individual are taken into consideration for calculating the rate of interest.
Advantages:
Long term loans are for a long period and hence the amount that can be given as loan term loan is large. Under normal circumstances, the rate of interest on long term loans is low as compared to the short term loans.
Disadvantages:
The total amount of interest that is paid in case of long term loans is high even though the rate of interest is low as the period is a long one and interest is paid for the whole period. The rate of interest may change during the period in which the loan has to be repaid.
Short Term Loans:
As understood by the name, these types of loans are for a short period of time. They do not have any compulsions as compared to long term loans. Short term loans are taken for payment of regular expenses. The amount that is granted as a loan is also a smaller sum is compared with the long term ones.
Advantages:
The short term loans are available quickly no long procedures are required. No guarantee is required for taking short term loans. As these loans are provided in a short period of time, any sort of immediate expenses can be met. With very less procedures there is also minimal paperwork.
Disadvantages:
The rate of interest in case of short term loans is higher as compared to long term loans and they prove to be expensive. Short term loans are not offered for large amounts which prove to be a disadvantage. As no security is given by the borrower the lender of the loan examines everything about the borrower before lending the loan as he has to take into consideration every pros and cons.
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