A loan is money received by and individual or entity, called the borrower, from a bank, private individual or financial institution with an agreement to repay the principal amount with interest, within a stipulated time.
Loans are beneficial for the economy because by lending to new businesses; opportunities for more healthy competition arise and that, in turn, increases inclusive cash flow in the marketplace.
In some cases, the will promise a property to the lender as a collateral for securing the repayment of the loan. For the institution that give loans, the interest paid on the loans are a primary source of income.
Types of Loans in Nigeria
Basically, there are two kinds of loans in Nigeria. Unsecured and Secured loans.
The other types of loans naturally fall under these two categories. Several features differentiate the different types of loans. These elements also determine the terms and condition of the loans.
A secured loan is a loan that has the backing of an indemnity. That is, it has something pledged to ensure it is ‘secured’. A classic example is banks requiring loan applicants to present housing documents or proof of ownership of an asset until they repay the loan.
The idea is that the lender, in a situation where the borrower is unable to repay the loan, can sell the asset to repay the loan. Other assets used for collateral are stocks and bonds.
Examples of secured loans are Mortgage loans and Term loans.
Mortgage Loans: This is a kind of safeguarded loan in which property or real estate is used as surety. The property is ‘mortgaged’ until the borrower pays back the loan. A mortgage loan can used for the purchase of a home.
Term Loan: This is a loan that banks and other financial institutions grant for an amount and repayment terms. This type of loan has a static interest rate which must be paid over a period. Most loans from financial institutions, especially banks, are term loans.
An unsecured loan, as the name sounds, refers to a type of loan given without asking for anything in return for security. This means that the borrower doesn’t need to pledge any property or asset as collateral.
For this type, financial institutions are thorough when assessing hopefuls. They accurately look through financial records to evaluate if the borrower can pay back the loan. Unsecured loans have more risks for the lenders, making the interest rates typically higher than secured loans.
Loans that fall in this category include:
Personal Loan: This is a loan given to an individual for their personal use. Financial institutions give these loans out based on the applicant’s credit history and ability to payback.
Credit Card Loan: This is a type of loan that a person can take with a credit card. The card permits them to make purchases when they don’t have cash. The lender provides the cash to make the purchases. Meanwhile, the borrower is to pay back the loan at an agreed-upon time.
Other Classes of Loans that you should know about
Besides the two major types of loans, we can categorize loans based on the following:
Based on the mode of repayment
Single payment loans
This loan allows an individual to borrow a certain amount of money and repay at once. Although it requires one to pay the amount in full, at once, and within a stipulated time.
Monthly payment loans
Monthly payment loans are different when compared to single payment loans, in that one is allowed to repay it gradually. Additionally, it is planned in such a way that you repay a fixed amount every month, based on the loan principal and interest. Also, the date in which repayment starts are fixed during the loan process.
Salary advance loans:
This loan is designed to help salary earners take care of their needs before their salary arrives. Businesses subscribes to personal loan companies and then give their staff access to loan as a result. The loan is repaid by deduction from the staff’s next salary.
Meanwhile, salary advance loans comes with high interest rates and fees.
According to rates
Fixed rate loans
Fixed rate means that the loan keeps the same interest rate throughout the span of the loan. Besides this, it could be any of the type loans explained in this article.
Installment loans are repaid with a set of scheduled payment. Usually, these loans could span really long (up to 30 years) or as little as a few months. A good example of installment loan is a mortgage. In essence, you borrow and pay up gradually.
Variable rate loans
This is the opposite of fixed rate loans because it comes with varying interest rates. Also, the interest rates are estimated based on certain changes to the underlying interest rate index. However, the rate has upper and lower limits, which it cannot move beyond within a time frame.
These loans have a flexible nature and can be changed from one type to another. This means that they could start as a fixed-rate loan, but later switched to variable loan depending on the situation.
Interest Rate and Repayment: It is essential to consider interest rates and repayment periods when choosing loan policies. Typically, the higher the interest rate on loan, the longer it will take to pay off the loan. Interest rates can be on either a simple or compound interest basis. Simple interest means a percentage of the principal amount.
Compound interest: Compound interest is the interest paid on interest. The borrower not only pays interest on the principal amount, but he also pays interest earned on both the principal amount and on the accumulated interest.
Loans can be complicated. Whereas they are an effective one-time solution, it is easy to get sidetracked and lost in a cycle of repayment and debt. Many people lost homes as a result of their inability to pay back a loan. So before you apply for that loan, you must be convinced that you have the ability to repay the loan as at when due.