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What is a loan?

Mar 31, 2008
Loans are normally, but not always, a financial arrangement where a sum of money is lent to another person; the borrower must abide by the payment terms by signing an agreement before the funds will be released. Lending money is the most usual reason but it can also include goods, services and even people but this article is dealing with those of a financial nature. Loans are required to be paid back and this is normally within a period set at the commencement of the contract; whilst it is possible to make 3 or 6 monthly repayments, the usual time period is one month.

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. many other cash raising methods exist but this is the simplest.

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 much more commonplace although most people do not actually recognize what they are; 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.

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. An easy way to do this is for a credit card company to issue cards to individuals and encourage them to use the cards and then keep them paying these amounts off for a long time because they have such high interest rates. Try to remember what has been written here and you might not have too many problems.
About the Author
For more advice on obtaining loans and loan information, visit http://www.smartloantips.com.
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