Movie Case Study
The scene shows Urja Nagre (Played by Jackie Shroff) demanding the payment of the money that he lent to Batuk Patel (Played by Boman Irani). Sandy (Played by Akshay Kumar) asks what was the loan amount. Urja replies that the loan amount is Rs. 5,000 crores including interest.
In this blog, Learning Perspectives will explore the meaning of loans.
What is a Loan?
A loan is the amount of money lent to the borrower with a promise of repayment in the form of EMI or equated monthly installments along with the interest. In the above case, Urja Nagre is the lender. Lenders or banks charge an interest rate that needs to be paid along with the principal. This is the cost of lending you the money.
There are two parties associated when a loan is awarded, namely the borrower and the seller. The borrower can be an individual, a financial institution, or a corporation. The lender is generally a bank or a financial institution. Banks conduct a thorough check-up before approving a loan. They check whether the individual has the repayment capacity for the loan.
An institution should have sound financials and creditworthiness to repay the loan.
Types of Loans
Secured loans are those which require one to list something of value to guarantee the loan. Most standard types of mortgages and auto loans are considered secured credit because the loan holder can take possession of your house or car if you don’t pay as agreed.
Collateral means an asset that the lender (bank) accepts as a security of the loan. For example: When taking a loan of Rs. 5,00,000, an equal value of the asset is to be kept as a security with the bank, in case the customer defaults.
These loans don’t require any collateral. It’s based entirely on your good credit history. Most credit cards fall into this category.
Under this type of loan, lumpsum is given to the borrower in exchange for a particular borrowing term. The rate of exchange can be either fixed or floating. Borrowers have the option to choose the rate. Home loans, car loans, and personal loans are classified as term loans.