Different types of loan

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Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2012 plz give answer about different types of loan in bank and how it is account? can saving bank account can transform into loan account ? full details about loan ?

@VaibhavJ

@VaibhavJ (Expert)
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14 December 2012 Hi

You want to know about personal loan or commercial loan.

Thanks//Vaibhva

Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2012 can you please explain both loan?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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21 July 2024 Sure, let's discuss different types of loans typically offered by banks and how they are accounted for:

### Types of Loans Offered by Banks:

1. **Personal Loans:**
- **Definition:** Personal loans are unsecured loans provided by banks to individuals based on their creditworthiness and ability to repay.
- **Purpose:** They are usually used for personal expenses such as medical emergencies, home renovation, education, etc.
- **Interest:** Interest rates are typically higher than secured loans because they are not backed by collateral.

2. **Home Loans (Mortgage Loans):**
- **Definition:** Home loans are secured loans provided by banks for purchasing a house or residential property.
- **Security:** The property being purchased serves as collateral for the loan.
- **Interest:** Interest rates are lower compared to personal loans due to the collateral provided.

3. **Car Loans (Auto Loans):**
- **Definition:** Car loans are secured loans provided by banks for purchasing a vehicle (car, motorcycle, etc.).
- **Security:** The vehicle itself serves as collateral.
- **Interest:** Interest rates are typically lower than personal loans but higher than home loans.

4. **Education Loans:**
- **Definition:** Education loans are provided to students or their parents to finance higher education expenses.
- **Repayment:** Repayment usually starts after completion of the course or a grace period post-course completion.
- **Interest:** Interest rates are generally lower compared to personal loans, and sometimes the government subsidizes interest during the study period.

5. **Business Loans:**
- **Definition:** Business loans are provided to entrepreneurs or businesses for starting a new business, expanding operations, purchasing equipment, etc.
- **Security:** Depending on the loan amount and risk, it can be secured (collateral-backed) or unsecured.
- **Interest:** Interest rates vary based on the borrower's creditworthiness and the nature of the business.

6. **Secured Loans:**
- **Definition:** These are loans backed by collateral (like property, stocks, bonds, etc.) that the borrower pledges to the lender as security for the loan.
- **Interest:** Typically, secured loans have lower interest rates compared to unsecured loans because of the collateral.

7. **Unsecured Loans:**
- **Definition:** Unsecured loans do not require any collateral. They are approved based on the borrower's creditworthiness and ability to repay.
- **Interest:** Interest rates are usually higher than secured loans because of the higher risk to the lender.

### Accounting Treatment of Loans:

1. **Creation of Loan Account:**
- When a loan is sanctioned, a loan account is created in the bank's books.
- The loan amount disbursed is recorded as a liability to the bank (due to the borrower).

2. **Interest Accrual:**
- Interest on loans accrues over time based on the agreed-upon interest rate and the outstanding loan balance.
- Accrued interest is recorded as income for the bank.

3. **Repayment:**
- Loan repayments by the borrower reduce the outstanding loan balance and are recorded as credits to the loan account.
- Repayments include both principal and interest components.

4. **Loan Default:**
- If a borrower defaults on loan payments, banks follow procedures to recover the loan, including legal actions or seizing collateral (if it's a secured loan).

### Transformation of Saving Bank Account into Loan Account:

- Generally, savings bank accounts cannot be directly transformed into loan accounts.
- Instead, individuals can apply for loans based on their savings bank account balances or relationship with the bank.
- Banks may offer pre-approved loans or overdraft facilities based on the average balance in the savings account.

In conclusion, banks offer various types of loans catering to different needs, each with specific terms, conditions, and accounting treatments. The choice of loan type depends on factors such as the purpose of the loan, security available, and the borrower's credit profile.