Throughout history, loans have played a huge part in many rich people’s roads to success; no venture has ever made it to the big leagues without financial assistance of some kind, either from a known party or from a bank. Not only big business ventures, loans have also helped millions of people around the world develop their lives by buying real estate, building houses, settling medical bills etc. However, the inverse is also true. Inability to pay back massive, unnecessary loans have bankrupted many people, from the super rich to just ordinary folk as well. Regardless, loans are a crucial part of society as we know it. Lets find out what is the loan service?
What are Loan Services?
Loan services are credit facilities provided by companies, usually banks and other financial entities, where individuals and businesses can borrow sums of money and repay it over an agreed-upon period of time, with an additional amount known as interest, which is the lender’s fee for this service.
The terms of the loan can vary depending on the loan type, lender and nature of the agreement.
The value of the approved loan depends on the requested amount as well as the borrower’s overall creditworthiness, which is judged by various factors such as income, education level, workplace, social standing and most importantly credit history. If the borrower’s credit history is not perfect, they can still get a loan but possibly for a lesser value than initially requested.
- Repayment period
The repayment period can generally be selected by the borrower but longer-term loans tend to have higher interest rates. Repayment period of loans can be as short as a few months (short-term loans) to as long as twenty five years for larger-value loans like housing or home loans.
- Interest type: there are two main types of interest rates: floating rates and fixed rates; floating rates means that whatever the lending company’s interest rate is at the moment it will apply to all floating interest rate loans whereas fixed interest rate loans keep the interest rate that was there at the time of getting the loan for the entire duration of the loan repayment. Floating interest rates are not recommended for long-term loans especially in volatile economic conditions. Borrowers can always change their loan interest type between the two options but with a hefty service charge.
- Interest rate
Interest rates depend on various factors, such as economic conditions, the going industry rate as well as the selected lender. Floating interest rates tend to be 1-2% lower than the going fixed interest rates. Another deciding factor when it comes to interest rate is the type of loan; unsecured loans are generally considered to have higher interest rates as the lender undertakes more risk in those transactions.
Unsecured vs Secured Loans
Secured loans are the most common form of loan referred to by people when they openly talk about taking loans. Secured loans require the borrowing party to offer assets or third party guarantors as collateral to the lending party when taking out the loan, which the lender can take ownership of and use to settle the debt in the event that the borrower is unable to meet the terms of loan repayment. Unsecured loans do not require any such collateral to be provided; the lender only looks at the borrower’s past credit history to determine creditworthiness, hence providing loans at higher interest rates to make up for the risk they undertake in these kinds of arrangements.
In the past, secured loans were generally considered the accepted norm when it came to safe and low-risk credit facilities. Most well-established banks and financial entities dealt exclusively with secured loans, leaving unsecured loans to be offered by smaller, ad-hoc agencies. However, in recent times, the acceptance of unsecured loans have greatly risen and not only are there dedicated service providers for unsecured loans, these services are also offered by most large-scale government and private banks. Regulations have also been enforced in this industry, thereby solidifying its credibility and trustworthiness.
Emergence of quick, easy, short-term loans
WIth the growing popularity of unsecured loans and the advancement of financial technology (FinTech), another type of loan has become widely-seen in local markets, especially amongst the underbanked and unbanked communities. Due to their very nature, unsecured loans have certain inherent traits such as being fast, easy and short-term. FinTech innovation has taken this a step further by creating online platforms for money lending, which allows borrowers to apply for and receive easy loans without having to visit a physical office or even having to leave their own homes. These services are being offered by newer, smaller, private FinTech companies like OnCredit.lk.
Some of the major advantages of online money lending are:
The entire transaction from application to money deposit can be completed in as little as thirty minutes sometimes. This is because unsecured loans do not have complicated application processes, require extensive documentation or background checks. The speed is further improved by the digitalisation of the process which can mean that the entire process is completed in just a few mouse clicks or finger taps.
Not only is the process quick, but it is designed to be extremely easy to navigate even for elderly people, first-time borrowers or those who aren’t so good with technology. Further, the only documentation required is usually a photograph of your National Identity Card and yourself. With just 2-3 steps, the application process can be completed.
Due to unsecured loans not requiring the borrower to meet a long list of criteria, the chances that an ordinary person without an impressive credit score to get their loan approved are high though they might not get the full amount requested.
Borrowers can now apply for loans using their mobile phones or computers which means that they can apply for loans from their own homes.
These types of loans are ideally suited for emergencies where people don’t have time to wait weeks for a secured loan from a bank to get approved and deposited. Despite having higher interest rates than secured loans, the speed and convenience of unsecured loans make them the best solution in certain situations. While unsecured loans come with their own set of risks, with careful weighing of pros vs cons, selecting a trusted service provider and exercising some self-control, they can provide some much-needed relief in times of need.