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Do you need to borrow money to buy a

car or maybe a house? If so, you might

be thinking about getting a bank loan. A

bank loan is a debt that a person, better

known as the borrower, owes to a bank

in exchange for future repayment of the

principal, plus interest which is basically a

fee you pay to borrow the loan. So let’s

say you need to buy a car, you go down

to your bank and ask them for a loan.

The loan officer will look at your overall

financial situation, how much income you

get, how much debt you have, so they can

determine to give you a loan or not, these

things all influence the interest rate you’ll be

charged, as well. Bank Loan is basically

an agreement between the borrower

and the bank about a certain amount of

money that the borrower will borrow and

then pay back at a specific interest rate

over a certain period of time in installments.

It is worth to be mentioned that a good

credit score is also very important for the

approval of your bank loan. In addition to

that, the bank requires information about

where you currently work and what your

current earnings are and the source of it.

What are Bank Loans?

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There are many reasons that encourage any person to apply for a bank loan for ex-ample: to own anything ranging from household items like washing machine, refrigerator or to buy a house also banks offer loans for owing consumer goods like computers and even for education and marriage. Moreover, one can start a new business with the help of bank loans. These days, especially due to progress in information and technology and easy access of internet, bank loans have become much easier because the loan seeker gets an easy access to the available information on bank loans from the bank’s website as it gives you the full details on different types of loans the bank provided.

What are Bank Loans?

B a n k Loans

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Secured Loans

Secured loan involves pledging an asset (such as a car, or a house) as collateral for the loan. If the borrower defaults, or doesn’t pay back the loan, the lender takes possession of the asset. In other words, if you are not able to pay back your loan according to the set agreement, the bank has a right to repossess whatever you put

up for the loan. Examples of secured loans:

Different Types of Bank Loans

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Auto Loans

Auto loans that are also known as Installment loans, are provided for purchasing new and used vehicles and for repair of older ones. The consumer has to pay back for it on monthly installments otherwise; the car will be repossessed by the bank.

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Small Business Loans

Banks usually offer these loans to people looking to start a business. They often

require a business plan to show the legality of what you are doing. These are often

secured loans, so you will have to pledge some personal assets as collateral in case

the business fails

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Mortgage Loans

This is most likely the biggest loan you will

ever get. If you are looking to purchase

your first home or some form of real estate,

this is likely the best option. These loans are

secured by the house or property you are

buying. That means if you do not make your

payments in a timely manner, the bank or

lender can take your house or property

back. Mortgage Loans help people get

into homes that would otherwise take years

to save for having a home and the interest

you pay is low compared to other loans.

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Unsecured Loans

Unsecured loans does not require the

borrower to put an asset for collateral.

The lender relies on the borrower’s credit

history and income to check if he is qualified

enough for the loan or not. In unsecured

loans, the borrower simply gives his word

to the bank that he will pay the loan back

in the terms agreed upon. In case the loan

is not paid back, the bank gets nothing. The

rate of interest in unsecured loans is usually

higher than secured loans, so the bank

ensures they get their money early in case

the borrower could not afford to pay back

the loan. Examples of unsecured loans:

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Credit Card Loans

A credit card is essentially an unsecured loan and the borrower should have a bank

account to obtain this type of bank loans. Moreover, each credit card has a certain

amount of money. In addition, the bank explains to the borrower that it is not for long-

term lending purposes.

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Student LoansStudent loans are offered to help students and their families

to cover the cost of higher education

Advantages and disadvantages of Bank Loans

Bank Loans Advantages:• FlexibilityWith bank loans, you only need to worry about making your regular installment payments

on time. This is an advantage over overdrafts, where you must pay the full amount when

the bank demands it. In addition, banks do not usually monitor how you use your loan as

long as you make your payments on time.

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• OwnershipWhen you take out a bank loan, you

have complete control over what you

do with the money. Unlike other forms

of loans and financing, the bank does

not assume any sort of ownership

or influence in the way you run your

business. On the other hand, paying

back the loan also is your responsibility,

and failure to do so can result in the

bank foreclosing on your business.

• Cost EffectiveIn terms of interest rates, bank loans

are usually the cheapest option vs.

overdrafts and credit cards.

• Retained ProfitsBanks require borrowers to pay only

the principal and interest amount on a

loan without any participation from the

bank in your achieved business profits.

Bank Loan Disadvantages:• Strict RequirementsBecause many bank loans require

some form of collateral, startups and

small businesses without any assets

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can find it difficult to get their loan

applications approved by the bank, as

they are not qualified for the bank loan.

In this regards, the only option for these

borrowers is to go for unsecured loans,

as a result, they will face higher interest

rates.

• Volatile Payment AmountsIf you obtain a loan with variable

interest rates, the cost of your monthly

payments may change during the

period of the loan.

• Prepayment PenaltiesYou may have to pay additional

charges if you want to repay your loan

before its maturity date.

• Risk of Losing CollateralBank Loans are generally sanctioned

against some collateral so if your loan

is secured against them, and you do

not meet your required repayments,

you could lose your personal property

or assets.

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Before you take out a bank loan, you need

to know how your interest rate is calculated,

and understand how to calculate it yourself

because if you know how to calculate

interest rates, you will be in a better position

to negotiate your interest rate with your

bank. The first important factor in the bank

loan interest rate calculation is to decide

the bank from which you will take loan.

The next thing which you can do is that

you can talk to the bank customer service

representative (CSR) to give you a complete

image about the loan you are going to

apply for and its interest rate calculation.

That’s why, you should sit down with one of

their financial advisors and figure out what

types of interest rates the bank can offer

you. Also, you are required to fill out a loan

application form that will be provided to

you by the bank’s CSR.

The banks relies on calculating your bank

loan interest rate on the basis of your

current job and earnings, your credit score,

and the type of loan that you are looking

for. Moreover, you must be sure that the

regular payments on your bank loan are

fully repayable on time so that you are not

penalized with higher interest rates or other

fees.

Bank Loan Interest Rate