Are you wondering what a bank loan is? Or do you want to know the definition of bank loan. No matter what your queries are about a bank loan, we will tell you everything about bank loans in this article, including its meaning as well as its different types.
Definition of bank loan
A bank loan is when a person is given money, which he or she must repay. In simple terms, a bank loan acts as a debt, which is owed by a person to a bank. This person is referred to as the borrower. Bank loan can be for any purpose. It can be to purchase a car, house, or for some personal needs.
Furthermore, a bank loan is a contract between the bank and the borrower. According to this contract, the loan is to be paid back and that too at a particular interest rate in a particular period of time. The borrower requests the bank to give him or her money as loan, so that he or she can purchase a specific item. Generally, a bank loan is used to buy an automobile or house.
In order to give loan to the borrower, the bank assesses the credit score of the borrower, along with his or her financial situation. This in turn determines the rate of interest that the bank will charge and whether the bank will provide the money to the borrower or not.
Types of bank loans
Now that you know the definition of bank loan, you must know what the different types of bank loans are. There are five types of bank loans, including secured, unsecured, demand, subsidized, and concessional. Depending on the type of bank loan, the rates of interest can vary.
Secured loans are those in which collateral is kept by a borrower in the form of a property, car, etc. For instance, if you keep an asset, such as a car for the loan, and then you fail to pay that loan, then the bank can acquire your car. One other example of secured loans is mortgage loans.
As the name suggests, unsecured loans are those where nothing is put as collateral and there is nothing to secure the loan. It is the opposite of secured loans. Such types of loans come with a high risk factor, as the lender cannot make the borrower pay on time or obey the terms in any way. Due to this, many unsecured loans have high rates of interest.
One type of bank loan is a demand loan and the definition of bank loan of this loan type is that it is a short term loan, which typically means that this type of loan does not have any fixed payment dates and it carries a floating rate of interest that varies as per the prime lending rate. These types of loans can either be secured or unsecured. Moreover, demand loans can be called to repay at any time by the lending body.
Subsidized loans are those on which the rate of interest is diminished by a hidden or explicit subsidy. In the United States, one example of subsidized loans is college loans, where there are no interest rates till the student is enrolled in his or her education.
Concessional loans, also known as soft loans, are granted on more generous terms as compared to market loans either through grace period, below- market rates of interest, or a grouping of both. These types of loans are offered as employee benefits to lending institutions’ employees or made to developing nations by foreign governments.
Thus, now you know the definition of bank loan, uses of bank loans, as well the different types of bank loans. Through this, you can stay informed as to which type of bank loan you should take for yourself.