Acquiring materials things would often require money. But what if money is not available as of the present moment? Would an individual defer consumptions in order to make savings for future utilization? Or would an individual obtain credit so he can acquire the thing that he needs or wants and would just promise to pay the lender at a future date? Those who can sacrifice some things as of the present time with the hope that he can acquire the things that he needs and wants in the future would resort to savings. Meanwhile, those who are in dire need of his needs and wants because of a certain reason would apply for a credit. The first situation would require an individual to practice frugality while the latter would compel an individual to take certain risks from borrowing.
Credit is one of the words that many people are familiar about. When it comes to credit, people normally associate it with loan.
Loan is a transaction normally made between two parties: creditor and debtor. It is an offer made by the creditor, which can be banks, credit unions or any financial institutions or individuals to the debtor, either individual or business, that uses the borrowed money for satisfying needs and/or wants. In some other cases, the borrowed money can be used for settling other obligations. This is in the case of debt consolidation loan. Interest rates normally come in a loan.
Aside from debt consolidation loan, there are other kinds of loan. Loan, being a type of debt, can also come with different kinds. The two classifications of loan are secured loan and unsecured loan.
Secured loans are loans with security in the form of real estate property or other assets, which can be pledged by the borrower as collateral. The creditor can take the collateral as a kind of security on his or its part and can have the right to seize and/or sell the property in the event a debtor defaults in payment. This right is called lien.
Foreclosure is the event that the secured property is disposed by the creditor as payment of defaulting borrower’s loan. This is a legal process taken by the creditor.
Creditor can also repossess items on loan such as a car when the borrower fails to make payments on due date. Repossession is the process that may or may not call for a court order depending on jurisdictions.
Mortgage loan and auto loan are two popular types of secured loans. Mortgage loan is mostly secured with real property, usually residential homes, for the purpose of purchasing another residence.
Mortgage loan normally applies to residential property. This is in contrast to commercial mortgage wherein real estates such as commercial buildings or other real properties of a business other than residential property can be secured as collateral. The duration of mortgage loans and commercial mortgage payment is mostly long-term but it depends on the agreement of both parties.
Meanwhile, auto loan or car loan is obtained for the purpose of acquiring a brand new or used car. The car taken on loan may be used as security for the creditor. The period of paying car loan is normally shorter. It often corresponds to the useful life of the car.
Auto loans can be direct or indirect. A direct car loan is offered by the bank directly to its consumer. An intermediary, usually a car dealer, comes between the financial institution and the car loan customer in an indirect car loan.
Personal loans, credit card debt, bank overdrafts, lines of credit and corporate bonds are kinds of unsecured loans. There are offered by financial institutions without any security such as collateral. The credit worthiness and earnings potential of the borrower are used by the creditor in offering unsecured loans. The interest rates of unsecured loans may be higher but they may vary in each type.
Loans are also classified according to the type of loan user. Consumer loans such as personal loans and credit cards are offered by financial institutions to its individual clients while commercial mortgages and working capital loans are granted to business and corporate clients.