Just like in other businesses, one can get a loan as a forex trader, even though they are different from the usual kind of loans one may be used to, and it is not accessible to all. As a matter of fact, new traders in most cases (if not all) do not have access to forex trading loans for some reasons. What is a forex trading loan and who can get it?
WHAT IS A FOREX LOAN?
A trader is said to have a forex trading loan if he or she gets some securities from another party to pay back in a later date. The payment is meant to be the exact amount of commodity borrowed, and some interest as agreed with both parties at the onset of the deal.
This is not so much different from what is seen in the case of bank loans (for example); where one can borrow money based on some terms and conditions, and pays back after an agreed period of time together with an agreed interest. Forex loan may be for a pre-defined one time amount or can be accessible as an open ended line of credit up to a particular boundary.
The terms surrounding a forex trading loan is based on the agreement of each party involved (the lender and the borrower) in the forex transaction before any money, currency or commodity changes hand. If the lender needs a collateral to be deposited, then it is stated in the loan agreement leaflets. Forex trading loans are made up of maximum amount of interest required and the length of time specified for the repayment of the amount of money loaned.
Forex trading loans can come from forex traders, investors/individuals, corporations, financial bodies, forex banks and the government. These loan parties provides a medium to increase the overall money supply in an economy, expand forex business operations and opens up financial competitions. The interest and fees generated from forex trading loans are seen as primary sources of revenue and income for the above listed loan participants.
TYPES OF FOREX TRADING LOANS
1. SECURED AND UNSECURED FOREX TRADING LOANS
Forex trading loans can be secured or unsecured. Secured forex trading loans can be defined as loans that can be backed up or safeguarded by collaterals. Examples are mortgages and car loans. Unsecured forex trading loans are those forex loans which are not backed up or safeguarded with collateral. These unsecured forex trading loans actually have a greater amount of interest rates attached to them. This increased interest rate of unsecured loans is due to the fact that they are riskier for the lenders. In a secured loan, the lender can have a possession of the collected collateral in case of a default in repayment by the borrower and this makes this type of forex loan less risky.
2. REVOLVING AND TERM LOANS
Forex trading loans can also be seen as revolving or term loans. Revolving forex trading loans are those loans that can be spent, repaid and spent again while term forex trading loans are those loans that are paid off in equal proportion and on monthly instalments over a specific period of time known as a term.
HOW INTEREST RATES AFFECT FOREX TRADING LOANS
Interest rates have a high effect of forex trading loans. Forex trading loans which have high interest rates stands to have an increased monthly payment or take a long time to pay off than forex trading loans with low interest rates. For example, if a forex trader borrows 4,000 dollars on the basis of an instalment or term loan with a 3.5 percent interest rate, he/she will be faced with a monthly payment of 58.33 for the next 5 years.
In conclusion, in forex trading loans, the higher the interest rates, the higher the amount to be paid while the lower the interest rate, the lower the amount to be paid.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.