Types of loans and mortgages

Loans and Mortgages — By Shopping Blogs on February 15, 2009 1:31 pm

Loan is a type of debt which can be borrowed by financial institutions, such as banks and credit card agencies to meet financial requirements. The borrower receives the loan amount from financial institutions and has to repay it in monthly installments as fixed by lenders according to pay ability of the borrower. The lenders utilize assets, such as home or auto of the borrower so as to recover the loan amount in case the borrower does not pay off the loan. The service of loan is provided at a monthly price which is termed as interest on the loan. The person who borrows the loan is subjected to terms and conditions of the mortgage bond made by the lenders according to which lenders can repossess the mortgaged asset in case the borrower meets payment default.

Secured loans
Secured loans are those loans in which the borrower has mortgaged some assets, such as a house in the hands of lenders. The lenders utilize the mortgaged asset or collateral so as to recover the monetary losses incurred due to non payment of debts by the borrowers. There are two types of secured loans- open end secured loan and closed end secured loan. Open end secured loans are secured either by a large amount of cash or by an asset such as utilizing home equity as collateral for getting loan.

In closed end secured loans, the lenders have full authority over the thing for which loan is taken. There are two common examples of closed end secured loans- auto loans and property loans. In property loans, lenders have full right to repossess the property in case of payment default and sell it to recover loan amount. In an auto loan, borrowers mortgage the purchased car.

Unsecured loans

Unsecured loans are given without any collateral and that is why they are termed as an unsecured loan. These loans are written agreement between two parties and lenders can take the borrowers to the court of law in case of payment default. Unsecured loans are of varied types such as credit card debt, bank overdrafts, personal loans, corporate bonds and credit facilities. Financial institutions, such as banks or credit card companies make a special scrutiny of the current financial condition and credit history of the borrower before approving the unsecured loan. In order to get an unsecured loan, one must have impressive credit history and steady source of earning so as to ensure the lenders of pay ability.

Common type of loan abuses
Predatory lending is one of the most common types of loan abuses where the borrowers are cheated by an unauthorized lender termed as loan shark. Usury is another common type of loan abuse in which the borrowers are charged heavy interest or sometimes unlimited interest by the lenders especially credit card agencies. When a borrower does not pay off debts to the lenders then that payment default can also be categorized under loan abuse.

Mortgages
Mortgages can be categorized into secured loans and are usually required for purchase of property especially home. Mortgages are of five main types, including fixed rate mortgage, 15-year fixed rate mortgage, 30 year fixed rate mortgages, adjustable rate mortgages and balloon mortgages. In fixed rate mortgage, the monthly installments remain fixed and do not change till the borrower pays off the entire debt. In Balloon Mortgages and ARM i.e. Adjustable Rate Mortgages, the interest rates are fixed in initial one or two year of the mortgage bond but after the initial period, it is adjusted according to prevailing interest rates of their company.

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