Loans when used properly have always been harbingers of growth and development. Successful businesses, personal growth, economic development, et al; loans have had a major say everywhere. Fundamentally, a loan is money that is borrowed and needs to be repaid to the party it has been borrowed from. The lender can levy interest on the amount that the borrower returns along with the principal amount.

Loans can be of many types but mainly you will find two kinds of loans - secured and unsecured. Secured loans are loans that are backed by collateral like home loans and auto loans. If one is unable to repay the loan, the collateral can be confiscated to recover the loan amount. Secured loans are mostly specific and can be used for specific things, home loans can only be used to buy homes while car loans are for cars only. However, unsecured loans like personal loans and credit cards do not require collateral. However, they come with a higher rate of interest than their secured counterparts. Unsecured loans can be used for any purpose like weddings, setting up a business, clearing previous debts etc. There is no constraint on what you can use a personal loan for.

The loan amount that you can avail  depends on a myriad of factors, these include your professional experiences, your credit score, and current debt among others.

4 Reasons Why Loans Are Important

1. Breaking down large purchases

The primary function of a loan is to help convert large expenses into smaller amounts and spread its return over some time. This helps people purchase items that cost more than their income and repay it in smaller amounts. Big purchases like homes or cars cannot be made in one go and this is where loans come in handy. However, there is something called interest, and it is the charge that you pay apart from the amount given as a loan and it is via this interest that the lender earns.

2. As aid in emergencies

As we all know life is ever-changing and very unpredictable and an emergency can come up anytime and anywhere. Emergencies like hospital expenses, and business expenses, can pop up anytime and these can be financially draining. Personal loans can help in such situations and help you pay back the amount in instalments.

3. Consolidate debts for easy repayments

If you have too many debts at too many places, it would be hard to remember and sometimes you might even forget to pay, making that debt even more expensive. A loan to pay off the other loans helps in keeping your debt in one place and making it even easier to pay.

4. Keeps emergency fund intact

Your emergency fund can come in handy for emergencies, however, once used up it takes time to recover it. A loan on the other hand can be paid back in smaller amounts without touching the emergency fund, which can be used to invest and grow.

Important Note: Non-payment of loan EMIs on time will hit your financial growth. Timely repayments help in building your credit score and with a healthy credit score, you become a darling of the banks, meaning you can be qualified to avail of larger loans in the future.

Conclusion

Loans can be helpful in a plethora of ways if used properly, which means making timely repayments and pre-deciding the EMIs based on your financial eligibility. If you miss this step then the loan in itself could become a cause for worry and concern.

Disclaimer: The information in this article is compiled from various sources and is an opinion piece only. This is not to be taken as a substitute for professional advice on managing finances, reader discretion is advised.

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