Interest As Backbone of Modern Economy - Part 2

by Shafi Farooq
http://mywebsiteworkout.com/personal-finances/

In modern world, especially the Western world and Japan, interest rate is considered the backbone of modern finances and that includes your family finances as well. It affects and impacts us all in every walk of life. Individuals and families ought to understand its importance.

The interest comes into play when we borrow money or lend money. Everyone is affected when the interest rate goes up or when it comes down. This backbone of the economy is controlled by the central bank of a country. In the U.S., it is called Federal Reserve Bank.

A few key rates can give clues about your own interest rates

If you borrow from a friend or relative, your good standing with them is enough and you pay the money with no interest. However, you borrow from a lending institution, there is always an interest attached with the loan.
Interest rate on credit cards are tied to the prime rate, which is the rate banks charge for unsecured business loans.Mortgage interest rates are closely related to the yield of the 10-year Treasury note.

Unsecured loan
The real meaning of an unsecured loan is that it is not backed by any object of value and is lent to you based on your good name. There is no collateral attached with it. When you use your credit card, you borrow or rent money and you have to return it with interest at some point.

Credit card companies don't ask for any collateral from you. It is your good name. More precisely, for financial institutional purposes, they may want to look at your credit score because they are not your friends and it is strictly a business transaction. Therefore, your good name may be associated with your historical payment history on prior debt, reflecting in your credit score. In any case, it is your good name that you have created for yourself over the years.

There are three types of unsecured loans.

First there is a personal unsecured loan, meaning a loan that you individually are responsible for the repayment of.
Second is an unsecured business loan which leaves the business responsible for the repayment.
Finally there is an unsecured business loan with a personal guarantee. With this loan, although the borrower is the business, you as an individual will be the payer of last resort if the business defaults on the loan.

Recently, some Swedish banks had age limits for older adults seeking unsecured loans. A public outcry led at least one bank to change its policy. The banks said that age group is high risk for this type of loan. An official of one bank said, "However much we may wish it were different, we know that the risk that we are going to die or seriously ill increases sharply with age."

Secured loan
It is the kind of loan that has some kind of collateral object of value attached with it. Mortgage loan is one. Your home is your collateral. If you get to be behind a few payments and you are unable to pay your monthly installment, then the lending company can repossess your home.

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan. Thus, the creditor, to her advantage, has secured the loan. In the event that the borrower defaults, the creditor takes possession of the asset used as collateral. She can sell the asset to satisfy the debt by regaining the amount originally lent to the borrower.

Article submitted Saturday, November 14, 2009 & read 54 times.

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