A loan is a financial transaction between two parties wherein the borrower receives a certain sum from the lender which is to be repaid over a specified period of time. The principal amount is returned with interest, which is the profit earned by the lender.
Following are the four main characteristics of loan transactions.
- Time factor
This indicates the period for which the loan is expected to be repaid. Borrowing may either be in the form of short-term, intermediate, or long-term loans. Short-term loans indicate a limited duration for the loan to be repaid, generally up to three years. However, this period varies from lender to lender and must be reviewed by the borrower before applying for personal loans online. Long-term loans, on the other hand, are taken for an extended period and therefore have lower EMIs. Intermediate loans allow individuals to make balloon repayments. Borrowers may, therefore, prepay the loan amount at regular intervals to reduce the overall cost of the loan.
Every loan is serviced at a fee known as interest. This interest may be charged either on a fixed basis or on a variable basis. A fixed-interest loan is where the interest remains constant over the loan term. According to this, the borrower is aware of the regular EMI amount and pays the same amount throughout the term. Variable rates, however, fluctuate according to rates prevalent in the market. Apart from interest rates, it also important to consider other loan-related fees like processing fees, late-payment charges, and repayment schedule charges.
Another important characteristic of borrowing finance is the collateral to be kept as a security against the loan. Collateral is generally in the form of assets like land or property. In case the borrower fails to repay, the bank or lending institution takes ownership of the asset. Typically, personal loans are unsecured loans, wherein no collateral is required as security. Such an arrangement is highly beneficial to individuals who do not wish to keep collateral or do not have any assets that may be pledged against the loan.
- Repayment schedule
Repayment schedule refers to the manner in which loan repayments are made. Often, lenders allow borrowers to opt for flexible repayment plans. This helps customers repay according to their cash flow. In case the inflow of cash for a particular month has increased due to a bonus or sale of an asset, the borrower may increase the EMI amount. Similarly, during times of a financial crisis, borrowers may pay a lower amount towards EMI. Such schemes go a long way in providing convenience to the borrower.
It is imperative to stay updated with all loan-related information before applying for a personal loan. Read the fine print of the loan agreement and only then sign on the dotted line. You may also visit the lender’s website to get details pertaining to personal loans online. Always make a well-informed borrowing decision that allows you to reap maximum benefits.