Types of Loans and Interest Rates

Understanding the interaction between the different types of loans and interest rates is important in money saving management. This holds true also to any fiscal or financial management. The basic types of loans and interest rates and their interaction with each other have been studied since "economy" and the different "monetary systems" came to existence. Doing away with any monetary activity without taking into consideration the effects of these factors on the transaction would be a financial disaster.

Different Types of Loans

A loan is simply a type of debt. In a loan, a party known as the borrower borrows money (principal) from a lender, with the obligation to pay the latter an equal amount of the borrowed money at a later time. Sometimes, the lender charges interest on the borrowed money. This interest fee is the price paid for the use of the money by the borrower.

There are many types of loans to mention. These are just some of the basics:

1) Salary Loan - This is a type of short-term loan payable mostly in 6-12 months wherein an individual borrows money from his/her employer, the maximum loanable amount is less or equal to his monthly salary, for any use the borrower wants it to.

2) Housing/Home Loan - A type of loan by meant for the repair or construction of a house. This is usually payable in aggregate payments for a period of 5, 10, 20, to 25 years or more depending on the agreed payment scheme by borrower and lender.

3) Emergency Loan - This is a type of loan for the purpose of meeting any emergency financial needs or purchase.

4) Student Loan - A student loan is a type of loan generally applicable to any loan procured by a student or learner in the course of his/her studies for the purpose of reaching his academic goals and pursuits.

5) Capital Loan - This is a type of loan which sometimes entails large amounts of borrowed money. This loan is meant, basically, for use as capital for any business venture, or to meet the expenses to be incurred in setting up an industry.

Different Types of Interest Rates

Simply speaking, Interest is the price paid by borrower to lender for the use or enjoyment of the borrowed money. An interest rate is the actual or specific amount imposed for the particular amount of money. Interest rates are usually computed basing on the annual price charged to a specific principal amount.

A few of these simple types of interest rates are as follows:

1) Simple Interest Rate - This is applied to the borrowed amount (principal only). This is the most basic type of interest rate and is common used for a principal payable within a period of less than a year.

2) Compound Interest Rate - This type of interest rate is calculated each period of time on the original pincipal the accumulated interests from past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semi-annually, quarterly, or even continuously.

3) Floating Interest Rate - is a type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the principal. This kind of interest rate is also called variable rate or adjustable rate.

4) Nominal Interest Rate - Simple speaking, this type of interest refers to the rate of interest before applying the effects of inflation to a particular principal or instrument.

5) Real Interest Rate - Real interest rate is simply computed as nominal interest rate minus inflation.

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