The concept of a loan should be viewed in more angles than just the existence of the financial relationship between two parties. At the outset, it does mainly involve the redistribution of assets from the lender to the borrower. It is also a form of debt but only with formalities and even legalities attached to the same. However, these are only the most basic details and one needs to go further and explore the nature of loans especially if you plan to take one out. First, you have to make yourself familiar with the various loan types and their purposes as well. If you are armed with sufficient information on the matter, this will give you the upper hand in handling your loan payments and erase whatever fears you may have.
When you understand the kind of loan you are applying for, then it becomes easier for you to come to terms with it. Remember that with each type of loan, you get a different set of terms and conditions, like the period for payment of the same. Let’s take for example the difference between the two major loan classifications: the long-term loans and the short-term loans. Long-term loans are those which are usually secured by some sort of asset in the form of real or personal property. We also know these assets to be termed as the security or collateral which have to be substantial enough to cover for the sum borrowed. Common examples of these long-term loans are the mortgage loans and also the car loans.
The purpose of a long-term loan is to answer for a financial need that requires a substantial amount of money. Some examples are housing projects or when you want to buy a car. It’s also the most suitable kind of loan for one who wants to finance a business start-up. Now when we talk about short-term loans, the amount involved is much smaller and must pay in a shorter period of time. It’s because the short-term loan is so structured so as to meet urgent financial situations that do not, however, involve very large sums. As an example of this, one might need money for immediate household repairs, car trouble, or to pay for activities of the kids in school. Since the amount involved is not that huge, you will be given a shorter period for payment although you should expect that there will higher interest rates.