One of the vital characteristics of human beings is their survival instinct. We face many problems day in and day out, but we have the ability to see opportunities in these problems. Problems and opportunities are two sides of the same coin. When there is an imbalance between our earnings and expenses, one of the options available to us is to go in for loans.
It is not always the people who have financial problems who go in for loans. People who want to expand their dwellings, or who want to live a sensational and adventurous life by traveling far and wide, and even those who just want to consolidate their liabilities, all look for loans.
There are two types of loans. One is secured and the other – unsecured. In a secured loan, the borrower is expected to give an asset as a collateral for the loan. The asset may be a home, a car, stocks or any other high-value item. If there is a failure in repayment of the loan, the lender has the right to sell the asset and that’s how they will recover their dues.
Secured loans are safe for the lender because they have the asset as collateral for backing up the money lent. For the borrower, the advantages are that the rate of interest is cheap, the amount of money got as a loan is relatively high and the repayment period is also reasonably long. Even if the borrower has a poor track-record for credits, the lender may choose to approve the loan since the asset is there as a back-up.
In the case of an unsecured loan, the lender does not insist on any asset to back up the loan. He or she considers the track-record of the borrower and assess his credit-worthiness. Based on this assessment, the amount of the loan and the rates of interest are determined. But the lender will always have a recovery plot to recover the loan in case of default by the borrower. This recovery plot could be asking for a guarantor to sign the required documents to the effect that in case of defaults by the borrower, the guarantor is liable to repay the loan. In the case of an unsecured loan – the amount lent is also much less than in the case of a secured loan, and the repayment period will also be shorter.
The advantages of an unsecured loan are that since no collateral is involved, there is no question of the borrower losing the asset. The borrower need not possess any asset to get the loan, and since the repayment period is relatively small – they can quickly get rid of the burden of the loan if they plans their finances properly and repay the loan comfortably.
Sometimes, loans are raised to kick-start the borrower’s business or for expansion of business. Other loans must be treated as temporary bail-outs. They are only quick-fix solutions. Borrowers should not get swayed by the availability of loans and become habitual borrowers.
Loans should be the last resort for people because usually lenders are very strict. Only in compelling circumstances, one should go in for loans. But if such a dire necessity arises, one should have perfect and unfailing plans to repay the loans.