why are terms and conditions like interest rate, time period, guarantee, mortgage etc necessary for giving a loan? Explain with an example for each condition
Answers
Advantage of the way you are not going to be
Terms like Interest Rate, Time period, Guarantee and Mortgage are necessary for loan giving. These terms decide the total amount of money you will be repaying back to the financial institution, after specific period of time.
Explanation:
Now let us understand this in simple terms:-
You approached a bank. You borrowed some money from the bank. You selected to repay back the same money after 10 days or maybe 1 month or 1 year.
Why would the bank be willing to offer you with financial assistance? This is where the interest rate comes into play.
The amount of money that you borrow from the bank is repaid back after adding the interest rate. So for a bank Interest rate is the profit they will earn on the sum you borrowed from them.
Now why does time period play a major role here? Time is important because you and the bank have to agree to make the settlements of the borrowed amount within decided time limits. The rate of interest is generally calculated in percentage and time is calculated in days, weeks, monthly, quarterly, half yearly or annually.
Based on the interest rate, the amount that you pay back as interest will still be the same, irrespective of the time.
Guarantee is a very different term. No one will give you money if you have nothing to keep in the place of money you borrow. If there is guarantee involved in between, then banks are assured that they can recover the loan amount from you, in case you fail to make repayments on time.
The guarantee is always equal to or more than the value of money you borrow from the bank.
Mortgage is when you are unable to make the repayments back to the bank. You borrow the money, you don’t repay back, then the bank will mortgage the guarantee (property or your assets).
You buy INR 100 from the bank, this is your principle that you have to pay back.
Bank charges 10 percent interest rate for one month. Then your interest will be INR 10 per month. So if you fail to repay back for three months the interest will be INR 30. Now after three months you repay back INR 100 + INR 30 (interest) = INR 130.
Here the time is three months or whatever agreed before taking the money.