What Is a Bank Loan?

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  • 0:01 Borrowing Money
  • 0:51 Secured and Unsecured Loans
  • 2:12 Make Sure You Pay It Back
  • 2:30 Lesson Summary
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Instructor: Molly Gigli

Molly has an MBA in HR and a BA in Organizational Leadership and Supervision.

Bank loans are common types of funding for many people who want to buy big ticket items, such as cars or homes. Read on to find out more on what a bank loan is, what it is commonly used for, and the different types of loans banks offer.

Borrowing Money

Do you need to borrow money to buy a car or maybe a house? If so, you might be thinking about getting a bank loan. A bank loan is a debt that a person, better known as the borrower, owes to a bank. It's basically an agreement between the borrower and the bank about a certain amount of money that the borrower will borrow and then pay back in specific increments at a specific interest rate. Interest is basically a fee you pay to borrow the money.

So let's say you need to buy a car. You go down to your bank and ask them for a loan. The loan officer will look at your overall financial situation - how much income you have, how much debt you have, and your credit score, so they can determine if you're a good risk to loan money to. These things all influence the interest rate you'll be charged, as well.

Secured and Unsecured Loans

The interest rate of your bank loan can also vary based on whether the loan is secured or unsecured. A secured loan is a type of loan in which the borrower has to pledge an asset as assurance for the loan. For example, if you pledge your tractor as an asset for a loan, and then fail to make payments on that loan, the bank can take your tractor. A mortgage loan for a house is an example of a secured loan.

An unsecured loan is a loan where there is not anything used to secure it. These types of loans are considered somewhat high-risk, since the lender does not have a way of making the borrower comply with the terms or make payments on time. Because of this, most unsecured loans carry high interest rates and are often only available to those with strong credit scores.

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