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Loan Basics: Understanding Key Terms
- Loan Term:
The loan term refers to the duration over which the borrower is obligated to repay the loan. It’s the agreed-upon period during which regular payments (Instalment) are made. Loan terms can vary, ranging from a few months to several years. Longer terms typically result in lower monthly payments but may accrue more interest over time. - Interest Payment:
Interest is the cost of borrowing money. When you take out a loan, the lender charges interest on the principal amount. There are two common types of interest:- Simple Interest: Calculated based on the original principal amount.
- Compound Interest: Accrues on both the principal and any previously earned interest.
- Secured vs. Unsecured Loans:
- Secured Loans: These loans are backed by collateral (an asset pledged by the borrower). If the borrower defaults, the lender can seize the collateral. Common examples include home mortgages (secured by the property) and auto loans (secured by the vehicle).
- Unsecured Loans: These loans do not require collateral. Lenders assess the borrower’s creditworthiness and income. Personal loans and credit cards are typical examples of unsecured loans.