A personal loan is a specific kind of debt. In case of a loan the financial assets are redistributed over a period of time normally between the borrower and the lender like all other debt instruments. The process of this loan mainly involves two steps as:
1. The specific sum of money required by the borrower is initially given by the lender which is known as the principal for a stipulated amount of time.
2. In turn the borrower is duty-bound to repay or pay back the total amount of the principal plus the amount of interest calculated during that period over the principal amount to the lender after the completion of the time period.
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In general the principal amount and the interest are paid back in the form of normal installments or may be in partial installments or in the form of annuities. It is important to remember that each installment amount should be the same.
Interest is nothing but the additional money that is charged by the lender for providing a certain amount of money to the borrower as debt. The interest acts as an incentive in case of the lender which encourages him to provide the loan. In case of legal loans, the two parties concerned in the case are enforced to sign a contract for the obligations and restrictions. It can also place the borrower under additional restrictions called loan covenants. The principal task of the financial institutions is that they act as a provider of the loan amount.
Common personal loans are car loans, home loans, credit card loans, installment loans, payday loans and such other loans. In case of loans given for business purposes, commercial mortgages as well as corporate bonds are required. One of the principal components is the credit score of the borrower, which involves, in and underwriting of the interest rates of these loans. The monthly payments or installments of the personal loan amounts vary with the payment terms. The installment amount can be increased or decreased by decreasing or increasing the period of the repayment of the loan respectively, though in both cases the overall interest has to be paid.
Some of the types of personal loans and their processes are discussed in brief below:
Secured loan - It is the type of loan in which the borrower has to pledge some asset as collateral like the mortgage loan in which the individuals borrowing the loan has to lien the title of the house, ( in case of house purchasing ) to the financial institution lending the money. After the repayment of the amount with interest, the bank gives the legal right to the individual to repossess the house or even sell it. The same procedure is maintained in case of car loans, auto loans etc.
Unsecured loan - these types of loans do not need any security. They are available in different packages from banks, for instance in the form of bank overdraft, credit card debt and so on.
Demand loans - these are short term loans that did not have any fixed date of repayment. In this case, the interest rate varies according to the Repo and reverse Repo rates.
Subsidized loans - in these types of loans the interest rates are subsidized by an explicit or may be by some hidden subsidy.
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