Meaning of Loan and its types
Meaning of Loan –
Loan is an arrangement of advancing a sum of money on interest for a pre-agreed period sometimes for a particular purpose as well. Usually, there are three types of loan namely – (a) Term loan, (b) Participation loan (c) Personal loan. Section 5(a) of the Banking Regulation Act, 1949 Speaks about Secured Loan.
Types of Loan
There are three types of Loan 1) Term Loan 2) Participation Loan 3) Personal Loan, which are discussed follows –
1) Term Loan –
The first type of loan is Term Loan. Term loan is one which is sanctioned usually to Industrial undertaking for a fixed Period. Term loan can be divided into three categories- short-term loan (up to 3 years), medium-term ( 5 to 7 years) long-term loan (10 to 20 Years)
Example – Loan to a Small business to buy fixed assets.
Before Sanctioning Term Loan the banker examines the assets liabilities of the applicant; The earned profit and earning capacity; the nature scope and working of the undertaking; the financial position of the undertaking; and the purpose and period of loan applied for in order to safeguard its own interest.
Main features of term loan-
- This types of loan are sanctioned for a fixed period.
- Short term loans or sanctioned for minimum 3 years
- Medium-term loans are sanctioned for 5 years to 7 years
- Long-term loans or sanctioned for 10 years to 20 years
- Periodical installments are usually the mode of repayment; and
- Bankers may avail the refinance facilities given by Industrial Development Bank of India for all terms loans sanctioned to industrial undertakings
2) Participation Loan –
Participation Loan is a loan by lending institutions. It arises when one lending institution is incapable or unwilling to shoulder the risk of a loan through an industrial undertaking. In another word, participation loans are loans made by multiple lenders to a single borrower.
In The United States of America this types of loans are very popular on the other hand India it is not, though it is gaining monument. Big and small bankers and other Financial Institutions, Co-operative Bank etc come together and participate in advancing loans to all those who are in need of loan for development purposes and who can play a key role in harnessing the country’s resources in the economic development of the nation
3) Personal Loan –
Personal loan is one which is sanctioned on personal security to individuals. this types of loan are intended to help the people of fixed income to raise their living standard…
Loan for house construction
Loan for house repairing
Loan for goods of comforts, for example, Bike, Cars, T.V, Washing machine, Refrigerators etc
This types of loan usually sanction or a period of 2 years. Personal loans are relatively unsafe.