What is a Bank Loan?

A loan can be defined as a kind of debt. It means that the money borrowed should be returned over a certain period. It means that the financial assets should be redistributed over time. There exists a certain understanding between the lender and borrower.

All the banks offer loans. In a bank loan the person who is taking a loan either receives or borrows a certain amount of money from the bank. This is called the principal. Here the lender is the bank. The borrower is entitled to pay back the sum in a certain period of time. He can repay in terms of monthly installments or partial installments. Generally every installment is made for the same amount. This is just one means of repaying back the amount. The banks give loans along with an interest rate which is to be paid along with the debt. It acts as an added advantage to the lender or the bank. The interest rate generally depends on the sum borrowed and the time taken to repay it back. This way both the lender and borrower will be benefited in a bank loan.

In case of a legal loan all the rules and the interest rate and obligations will be documented and written down as contract. This acts as proof that the person has borrowed a certain amount of money under certain rules and has to repay in a fixed amount of time. The time can be decided by either the borrower or the bank. A contract generally has extra rules and strings attached which place the borrower under certain restrictions. This is called as loan covenants. The financial institution, that is, the banks acts as a major provider of loans.

There are a various types of bank loans. Secured loan is a type of loan in which the borrower has to pledge assets as assurance for the loan. He will get back his assets only when he repays the loan. A mortgage loan is a type of loan where the money is used to buy property. It is a very common type of loan. The bank gets financial security on the title of the house. It is called as lien. That is until the mortgage is paid off completely the bank owns a part of the house. If the loan is not paid back then the bank can claim the house as its own. It would have the legal right to do so. It can sell the house and gain the sums owing to it. In case of auto loans there are two types - direct and indirect. In direct auto loan the bank directly gives the money to the borrower. In indirect auto loan a car dealer gets the loan for the customer. Hence he acts as an intermediate person between the bank and the borrower.

Loans can also be offered by pledging stock owned by the borrower against losses. It is called stock hedge loan. Unsecured Bank loans are those loans which are given without pledging any assets of the borrower

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