Brief idea on Loan and its abuses

Loan can be termed in other word as debt. It is the redistribution of financial assets between lenders and borrowers. The circle goes in this way, the borrower receives money from lenders and they pay back to the lenders with some additional cost which is known as interest. Contractual agreement between lender and borrower makes a loan secured.

It is the principal tasks of the financial institutions to act as a provider or lender of loans. It is always important to raise the money supply in a nation and the bank or other financial institutions are playing that role.

 

 

Types:

Generally loans are categorized in two parts:

  • Secured loans
  • Unsecured loans

Secured:

Secured loan can be defined as “a loan in which the lender or borrower pledges assets like property, land, home, car etc. as collateral.”

Mortgage loan is one of the most common and popular types of secured loan which individuals used to purchase home. The financial institutions are given the license to repossess the housing and sell it to recover the due amount if the borrowers are unable to pay off the full amount of loan. Car loan is another type of well known secured loan, but its duration is much shorter than housing loan.

Unsecured:

Unsecured loan can be defined as “It is a loan which is not secured against any assets of the borrower.” Unsecured loans are available in the financial market in the form of different marketing packages like:

  • Credit card
  • Personal loan
  • Bank overdraft etc.

The interest rates on these loans vary from lender to lender. These loans may not be regulated by any law.

Some Abuses of loan:

Predatory lending: One of the popular abuses is predatory lending. It works in this way; lenders put the borrower in a position from where they take advantage over the borrower.

Loan shark: It is known as loan shark when the moneylenders are not authorized. That means loan shark is nothing but a lender who offers illegal unsecured loan and with high rate of interest.

Usury: When any unsecured loans are given at excessive interest it is called usury.