The term loan refers to money or valuables that are borrowed, then repaid, usually with interest. Loans are usually paid in installments over a specified period of time. In some cases, they are paid in lump sum or in whole.
There are three types of loans: secured, unsecured, and demand loans.
Secured loans require a borrower to commit an asset as collateral for the loan. This committed asset is also called lien. The collateral or lien serves as security. If the borrower defaults on the loan, the lender has the right to claim the property in place of the payment. In cases like mortgages and car loans, the property purchases serve as collateral.
Unsecured loans do not require the borrower to present any collateral. This makes unsecured loans more accessible to the public. In return for this accessibility, unsecured loans usually charge considerably higher interest rates as compared to secured loans. Penalties for late payments are also steeper. Examples of unsecured loans include credit cards, personal loans, and bank overdrafts.
Demand loans are short term loans that can be recalled by the lender anytime and has an interest rate that varies according to prime rate.