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People borrow a loan to buy or pay for things they are not able to pay for in cash. A loan can be used to buy a car, a house, renovate the house, pay medical bills, pay for education or take a vacation. The loan will be charged interest for the term of the loan. The interest rate depends on the lender. When the interest rate is fixed the repayment per month will be the same. When the interest rate is variable it may move up or down depending on the economy. The loan repayments will also vary depending on how the interest rate varies. An adjusted interest rate may be low and fixed in the beginning and become variable after the agreed period.

The credit history of the borrower is very important. When the credit score is high it means the borrower has been paying the past and present loans and debts on time and will honor his obligations. Giving a loan to such a person is less risky. When the borrower has a bad credit history and a low credit score there is likelihood that if he is given the loan he might not pay it back. People with poor credit scores will require a co-signer with good credit history, who can be family or friend, to commit to repay the loan if the borrower fails to pay. Today, banks are lending to those with bad credit history and charging them higher interest rates to compensate the high risk of losing the money.

There are-:

- Secured loans and
- Unsecured loans
- Demand loans

Secured loans: The lender will ask the borrower to provide an asset or property to act as collateral or security for the loan. This can be a car, a house or any other asset. The asset can be re-possessed when the borrower defaults. The asset will be sold and the proceeds used to pay the loan and related expenses.

Unsecured loans are offered without collateral. They include personal loans and advance loans, bank overdrafts, lines of credit and credit card debts which are very popular because they are processed very fast. Personal loans are even applied for online and the money is wired to the bank account within hours. These loans are used to pay for unexpected expenses and emergencies. However many people find themselves overspending and doing impulse buying. A budget is very important and sticking to the budget is even better.

Demand loans are short-term secured or unsecured loans which can be called back by the lender any time.

A loan can be taken to pay for college education for the children of the borrower. Federal education loans are charged lower interest rates than private loans. Subsidized loans do not accrue interest the borrower starts repaying while secured loans accrue interest from the time they were disbursed.

There are origination fees charged and different lenders have different rates. The monthly repayment amount depends on the duration of the loan.

Last modified onTuesday, 02 April 2013 23:45
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