A loan is a debt given by the lender (financial institutions) to the borrower (individual/company) at an agreed rate for a given period of time and with a promise that the borrower will return the money with interest as per the written agreement.

Types of Loans

1.) Secured Loan

A secured loan is a loan where the borrower has pledged his/her collateral to a lender for securing the loan. Here, the lender can dispose of the collateral and realize the outstanding balance in case of default. The end use of a secured loan is almost fixed. For example, if you take a home loan or an auto loan, then you can use the loan for that particular purpose only but in case of a loan against property, the borrower can use the amount for other purposes as well. The best examples for such loans are –

  • Home Loans
  • Loan against Properties
  • Auto Loan

2.) Unsecured Loan

The unsecured loans are highly risky for the lender as the borrower do not provide any security for securing the loan and the borrower can use the loan amount for multiple usages. That’s why in case of unsecured loans, the lenders have to do a proper background check of the CIBIL score and financial health of an individual before granting the loan. Since it is an unsecured loan, the interest charged by the financial institutions is high. The best example of such a loan is –

  • Personal loans.