Loans Overview More on specific types of loans: Consumer (Personal) Loans Housing Loans and Mortgages A common option in a financial emergency is to take out a loan. A loan is just a form of debt, where the borrower receives money from a lender who must be paid back. Some people ask for a loan because they are short of money, while others want to soften the impact of a major purchase. Either way, most of us use loans for a wide variety of purposes. Without them, many of us would find it difficult to buy expensive, but essential things. A loan normally has a repayment schedule, whose duration is fixed by contract (loan tenure), as are the monthly repayment amounts. The loan funds are normally disbursed (paid out, either as cash to the borrower or directly to the retailer/service provider) as soon as the loan is approved. Loans can be classified by maturity (the length of the repayment period): short-term loans (usually less than a year) long-term loans (longer than a year) A loan can be non-specific (a cash loan) or earmarked for a specific purchase (consumer loan). Consumer loans are commonly used to buy: household appliances electrical goods furniture medical services vehicles One special type of earmarked loan is for housing. These are loans of very long maturity, secured against the property. Loans differ from other forms of borrowing, like revolving credits, credit cards and overdrafts. These other forms of borrowing (revolving credits and overdrafts) can be used, repaid and reused without contractual procedures. Loans always involve an application process, a creditworthiness check and a contract between bank and borrower. Why use loans for purchases? Most households need some expensive goods and services, given our modern standard of living. Such purchases can cost rather more than the household has in disposable cash, while buying a home will be the largest investment most households (or individuals) ever make. Consumers are, therefore, often interested in enjoying goods and services now and paying for them gradually over a longer period of time. Retailers also benefit from the availability of consumer loans, as they facilitate and increase sales. Loans (especially consumer loans) are an easy way for individuals with insufficient savings to fund purchases. This does not mean there is no way of avoiding such loans. Many goods can be bought without loans, by planning purchases in advance and saving beforehand. Paying cash avoids interest-related costs. Instead of making monthly installments for a new LCD TV or washing machine, consumers can save first and earn interest on their savings before buying the goods. Prospective borrowers should be aware that many loan-purchased goods lose value over time. This means there are two kinds of associated cost during the life of the loan: interest (and another loan costs) and depreciation. Long-term borrowing is only cost effective if used for durable investment which may add value over time (like housing, education and so on). Borrowing for speculation (e.g. investing in shares or property speculation) can turn highly problematic, if assets lose value. Short-term borrowing should be used only to manage temporary financial shortfalls or to purchase non-durable goods. The shorter the loan period, the less the loan costs. Shopping for a loan is like shopping for any other product. Clients should look in several banks. This provides fuller insight into what is available and teaches clients about the approval process. Bank clients should insist on clarification of all details related to the loan contract and the duties and rights of both parties (borrower and bank). They should study the contract carefully before signing and seek advice from several sources. It is very difficult to change loan contracts after signing. One purpose of this website is to provide bank clients with unbiased information. The text provides clients with basic information and general concepts and is not intended as a technical aid for financial professionals.
