Bank Loan Types of bank loans
Among the different products that bank branches can offer us, loans are the most requested by the current consumer. Without such products it would be very difficult to carry out different activities. There are different types of bank loans and it is important to know their nature.
What is a bank loan?
A loan is a sum of money borrowed from the bank to help certain planned or unplanned events. The borrower must repay the loan, including interest charged during a stipulated period. The user requests an amount of capital from a financial entity, is assessing their situation and accepting or not their request. Once accepted, the consumer must return the amount in stipulated terms plus commission.
It is important to note that the use of a bank loan should help solve a situation and not aggravate it. Therefore, maximum responsibility and prudence is recommended when making a decision of this style. For different situations there are different types of bank loans , each with its specific characteristics. Let’s see what they are and their special characteristics.
Types of bank loans
There are many causes to request money from banks. All these causes are of a very different nature and there is a type of bank loan for each.
In theory, each loan is designed for a more or less specific activity. Thus, banks offer the following types of bank loans:
- Personal loans It is a type of loan requested to cover specific money needs and at a certain time. They are usually small amounts to resolve issues such as a trip, a wedding, etc. More and more people go to these types of bank loans to cover these needs. They usually have short-term repayment terms in line with the lowest amount borrowed.
- Consumer loans These banking products are often used to finance durable products or services. The purchase of a car, an appliance etc. They are loans of rather low amounts to be repaid in a short time. They are also products of great demand and used by today’s society.
- Loans of studies . It is probably the least known type of bank loans, in countries such as the United Kingdom and the United States they are very common products and have a great effectiveness. As its name implies, they are products to finance scholarships or study fees and facilitate academic training.
- Mortgage Loans It is a loan secured by real estate or real estate called a mortgage. In exchange for the funds received, the bank obtains the promise of that buyer to return the funds within a certain period of time for a certain cost. The mortgage is legally binding and ensures the right to have a legal claim against the borrower’s house if the borrower does not comply with the terms of the mortgage contract. Basically, the borrower owns the property, but the lender owns it until it is completely canceled.
Advantages and disadvantages of bank loans
As we have said before, each bank loan has its own nature and characteristics. The repayment of loans is one of the factors that differentiate between them. Therefore it is important to know what advantages and disadvantages entail the application of a bank loan.
Bank loans are designed to facilitate certain financial activities, hence it is possible to obtain certain advantages:
- Flexibility. Generally, with bank loans, you just have to worry about making regular installment payments on time. Banks generally do not monitor how you use a loan whenever you make your payments.
- Profitable Although it may not seem like it at first sight, bank loans are profitable. In terms of interest rates, bank loans are usually the cheapest option compared to other options.
- Tax benefits. When a bank loan is used for commercial reasons, the interest paid on the loan is a tax deductible expense.
But you also have to take care of the disadvantages that are distilled from the characteristics of bank loans:
- Strict requirements: Because many bank loans require some type of collateral, new and existing businesses without any assets may have difficulty approving their loan applications. If these borrowers opt for unsecured loans, they suffer higher interest rates.
- Periodic payments Any type of loans entails periodic (monthly) payments. Those who fall behind in payments face the possibility of having their assets seized. Even if you manage to make late payments, your bank may still report it to the delinquent offices, a measure that negatively affects the credit score.
- Irregular payment amounts. In the case of obtaining a bank loan with a variable interest rate, the rate changes according to market conditions. This makes it difficult to determine the exact amount of future payments.