What Are Loans?
A person or body that provides another with a sum of money (loan) is called the creditor and the person borrowing the sum is called the debtor; the borrower must abide by the payment terms by signing an agreement before the funds will be released. Whilst just about anything, product or service can be lent out; the information below focuses on financial arrangements only. Like all debts, a monetary loan entails the gradual payback of the initial sum borrowed over time, between the lender and the borrower; normally repaid in regular amounts, which can be on a monthly, but sometimes three monthly basis.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. More frequently the amount is repaid in equal installments, a portion of which is the interest.
Although this is the main function of all financial institutions, they do have other functions as well. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. whilst other ways to raise capital can be used, this is often the quickest method.
Another common type of debt, particularly in the Western World is a mortgage and is the primary way real estate is purchased, but this is all it can be used for. As the amount involved is generally much greater, the financing company which owns the debt retains the titles to the property for the entirety of the mortgage, only releasing the title when the last payment is made. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; to recover sums owing to them, they may place it an auction.
Although not a regular method of security, the financing company may demand that the object of the loan also becomes the security for it; where a car is purchased using this method, it becomes the security for the amount borrowed. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; in this case money lent for a car will have a relatively short repayment period.
The marketing companies are clever at disguising unsecured loans and the vast majority of people do not even realize they probably have them; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. Every bank and other financial institution has different methods to calculate the interest they charge on unsecured credit but a good rule of thumb is that store cards will be the highest followed by credit cards.
Abuse in the granting of money is known as predatory lending; it usually involves providing cash in order to put the borrower in a position where one can gain advantage over them. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. Take a step back before you sign any financial agreement.
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