What are Loans?
April 28 | Filed under Finance | 
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A loan is a type of debt and usually refers to one involving a cash sum paid to the borrower by the lender; once complete it becomes a legally binding contract. Any material item can be lent but this article focuses exclusively on those involving the lending of money. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; 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. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. The more common type of is where the interest charges are added to the capital sum then the total is divided into equal amounts with a small amount of interest being paid each month.
Although this is the main function of all financial institutions, they do have other functions as well. A loan is a simple way for many people and businesses to have a sum of disposable money in the bank (it’s just the amounts that differ); 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. However, in this situation a form of security is needed before the money is lent and the title to the property is the normal method for financial institutions to use; releasing them once the final installment is made. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; although selling the property is one option, keeping it as an investment is another.
In some instances, this method of security can be used when taking out a loan for a car for instance; in this instance, the car becomes it’s own security for the debt. To ensure that the finance company does not lose money, secured loans on cars are normally short term; where cars are concerned, this term will only last a handful of years.
Unsecured loans are available from financial institutions under many different guises or marketing packages; this can include the credit card, personal arrangements, bank overdrafts and other forms of credit. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. This type of lending also takes place with credit card companies around the world who issue credit cards with high charges which take a disproportionate amount of time to pay off; even small balances, just to retain a customer. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
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