Loans

We are all familiar with the concept of a loan. It is actually one of the major functions of a bank, the processing of loans. It keeps our economy healthy and is an efficient way of implementing monetary policies as well. Let us learn about the various types of loans and familiarize ourselves with some questions.

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Loans

A loan is essentially the money that one individual, organisation or institutions lends to another individual, organisation or institution. It is the borrowing of money for a specific period of time with the intention of returning it with interest.

Some important terms regarding a loan are as follows:

• Principal: This is the actual amount of money being borrowed, the principal amount
• Interest Rate: The rate at which interest is being charged on the loan. It is generally represented per annum (for example 8% p.a.)
• Interest: The interest being charged when represented in monetary values
• EMI: Easy Monthly Installment, i.e. The monthly payment to make on the loan
• Date of Repayment: The date by which the borrower agrees to repay the loan, principal along with the interest

(Source: influxmoney.com)

Browse more Topics under Banks

• Major Functions Of Banks
• Introduction to Banks
• Reserve Bank of India
• Departments of RBI
• Functioning of RBI
• Security Features of Rupee
• Capital Adequacy Ratio
• Types Of Deposit & Accounts
• Major Security Issues & Challenges
• Debit Cards, Credit Cards & Microcredit
• Banks Practice Questions

Types of Loans

Secured Loans

This is a loan which has been secured by some asset or property. So the borrower will pledge his assets against the loan. In case the borrower defaults on his loan, the bank will become the owner of such asset. It can sell the asset and recover the amount owed to them.

A mortgage is one popular type of secured loan. Here some real estate is kept as collateral to borrow funds from the bank. If the borrower defaults, then the creditor will gain ownership of the property

Unsecured Loan

Opposed to secured loans, an unsecured loan is one in which the borrower does not keep any of his assets as collateral. These loans are always riskier from the bank’s point of view, but they are an essential tool in the business world for short-term funds.

Some forms of an unsecured loan are;

• Line of credit
• Overdraft facilities
• Personal Loans
• Credit Card debt
• Peer to peer lendings

Demand Loan

These are typically short-term loans. They do not have a fixed term. This means that they are payable ar demand, whenever the lender demands, the borrower has to repay. A demand loan also will not have a fixed rate of interest. The rates will fluctuate according to the prime lending rates prevalent in the market

Subsidized Loan

In a subsidized loan the rate of interest is subsidized. Which means the borrower is given the loan at a lower rate f interest than the going rate. The government is the one that provides the said subsidy.

These subsidized loans are generally given to students when they take loans for educational purposes. Some agricultural loans are also subsidized in India, to help farmers with growth. There are times when the entire interest amount may be subsidized.

Commercial Loan

These are generally taken by business and companies for capital requirements or funding of operational costs. Commercial loans generally tend to be secured by some collateral assets. The amount of loan is also generally higher than personal loans.

Solved Question for You

Q: The Prime Minister Employment Generation Programme (PMEGP) offers which of the following?

1. Concessional Loan
2. Personal Loan
3. Subsidized Loan
4. Short-term loan

Ans: The correct answer is C. PMEGP aims to generate employment opportunities in rural and urban areas by establishing micro industries. For this purpose, it offers subsidized loans up to the amount of 25 lacs, if the business and the individual meets all the requirements.

Q: What do we call a soft loan that is granted on very favourable terms to the borrower?

1. Concessional Loan
2. Subsidized loan
3. Personal Loan
4. None of the above

Ans; The correct answer is A. A concessional loan has very compromising loan terms with respect to the rate of interest, grace periods for repayment, longer terms etc. Such loans are offered to developing countries by other countries or financial institutions.

Q: What is the maximum limit of money that can be borrowed against shares held in the physical form?

1. 20 lakhs
2. 10 lakhs
3. 5 lakhs
4. 1 lakh

Ans: The correct option is B. When physical shares are kept as collateral then the maximum amount an individual can borrow from the bank is 10 lakhs. And if the shares are in a dematerialized form (demat account) then the individual can borrow up to 20 lakhs against them.

Q: The rate of interest in an unsecured loan is usually ____ than a secured loan.

1. Lower
2. Higher
3. Same
4. None of the above

Ans: The answer is B. The rate of interest for an unsecured loan is always higher. The loan is not protected by any security or collateral. The risk that the bank bears, in this case, is much higher. If the borrower defaults, the bank has no way of recovery. So the interest charged is higher to compensate for the higher risks.

Practice Questions

Q: What type of loan is a bank guarantee?

1. Personal
2. Commercial
3. Unsecured
4. Secured

Ans: B

Q: Demand loans are which of the following?

1. Secured
2. Unsecured
3. Both
4. None of the above

Ans: C

Q: Packing credit is a type of loans generally given to

1. Salaried person
2. Students
3. Exporters
4. None of the following

Ans: C