What is a Loan?

A loan is a type of credit medium in which some amount of funds is lent to someone in exchange for future repayment of the principal amount. At times, a lender may also add interest and/or finance charges to the principal value that the borrower has to repay in addition to the principal balance. Loans can be for a specific, one-time amount, or be available as an open-ended line of credit up to a specified limit.

There are two types of interest rates applicable to loans, simple or compound interest. The interest on the principal loan is termed as simple interest, and banks very rarely impose on borrowers simple interest. On the other hand, compound interest refers to the interest on interest, which means the borrower has to pay more money in interest. In other words, the interest is applied to the principal and the accumulated interest accrued from the previous periods. Bank usually implies at the end of the first year, the borrower owes both, the principal plus interest for that year. In the second year, the borrower owes the principal along with the interest for the first year plus the interest on interest for the first year.

There are various forms of loans- secured, unsecured, commercial/business, and personal loans. The other type of loans is Home Loan, Education Loan, Car Loan, Gold Loan, Mudra Loan, and Agricultural loan for farmers.

In India, you'll find a variety of loans offered by various lenders and banks. Moreover, they could seem pretty lucrative and attractive, however. Do bear in mind you've to repay the loans on time. If you fail to do so, it will result in unnecessary fines and charges that will ultimately increase the overall cost of the loan.

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