What is a Commercial Loan?

Loan

What is a Commercial Loan?

In business, a loan is an asset or collateral that is given to one party, institution, or another entities for a specific purpose. The recipient is obligated to pay interest on this debt according to the contract and to repayment of the principal sum borrowed as well. There are different types of loans that can be availed depending upon your circumstances, financial needs, and goals. However, before you choose to take any loan, you should first understand how loans work.

Loans are generally collateralized against any property, real estate, stocks, accounts receivable, etc. In most cases, the property must be used as the collateral to secure the loan amount from the lender. For example, if a buyer wants to purchase a house, the lender may consider offering him a mortgage loan which entails him to pledge the title of his property in case of non-repayment. In this way, he can obtain the money he needs at low interest rates and a flexible repayment period. In case he fails to make the required payments, the lender has the legal right to take over the mortgaged property to recover his lent money.

Depending on the type of loan being availed, the payment terms are to be decided. For instance, a secured loan term refers to those requiring borrowers to deposit their belongings in the lender’s possession. Usually, this type of loan term has a fixed rate of interest, installments, and payback period. If the borrower makes late payments, his assets are kept by the lender and he can repossess them.

A signature loan is a form of unsecured loan wherein the borrower owes the lender a sum of money without placing any of his properties in his possession. It means that the borrower does not have to place any of his assets as collateral. A signature loan provider requires the borrower to make the requisite payments before the loan matures. The required amount is paid by the borrower directly to the lender. Repayments can be made in installments or in full.

A promissory note is an instrument that enables a lender to collect a loan from a borrower. Such instruments are usually signed by the borrower and the lender. They enable the lender to collect the money due to the borrower along with the interest and charges. In contrast to a signature loan, it does not involve any legal commitment between the parties. This form of a loan can be used by tenants and individuals who do not own their homes.

Lenders may charge origination fees and listing commission to loan applicants. These may vary depending on the type of a loan being applied for and the amount of a loan. Typically, all fees are paid by the borrower once he has satisfactorily completed the process of applying for the loan. In certain cases, borrowers may pay a listing commission to lenders. The interest rate charged on these types of loans will also depend on the credit rating of the borrower as well as his employment history and his previous loan applications. However, some lenders may also charge higher interest rates to borrowers who have not been able to get a loan previously.