What do people mean by a loan?
Vicki Lewis
When money is lent to a person or organization, it is said to be a loan; normally finalized by a legal document as it is a binding arrangement between the two. Lending money has been around since it was invented although people and other goods or services have been lent to others for longer but as the majority of these are for money; this is what this article is about. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; the usual repayment method is based around monthly installments but this period can be longer.
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. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; other ways to raise capital are available but none as easy as this.
Long term financial arrangements designed for individuals and companies to buy real estate is called a mortgage but it can only be used for this purpose. In this instance, the lender is given security on the money advanced in the form of the title deeds of the house until the debt is repaid in full. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; whilst they can reclaim money owed immediately this way, they may also decide to retain the property until a later date.
There is nothing to stop any lender asking for the loan to be secured and this can happen when a car is bought using this method; if the person using the money to buy a car defaulted on the money used to purchase it, the car would be sold to repay the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; 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; credit cards, a bank overdraft, even a line of credit for instance, are all examples of unsecured lending. The interest rates applicable to these different forms may vary depending on the lender, the borrower and the type of credit supplied.
There are many names for it but predatory lending is the most common; used when a company places pressure on a person to use their services in order for the company to have a financial hold on that person. Criticism of some credit card suppliers in a number of countries is also made as they issue cards to individuals at extremely high rates of interest in an underhand attempt to keep them paying off even small balances for a long period. 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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