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What is meant by the term loan

Apr 1, 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.

Generally speaking when debts are provided by family members, no charge for this service is made but usually the person providing the money needs to be compensated and this is done by adding an interest charge to the amount owed. For instance, some debts repay the interest first and then once this is cleared, the borrowed sum is gradually repaid. 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. 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.

Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; 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. Whilst secured loans can last a considerable time, this is usually as long as it remains possible for the finance company to reclaim costs should they need to sell the item; for cars, this very rarely extends beyond five years.

Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. 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.

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 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.
About the Author
For more advice on obtaining loans and loan information, visit http://www.smartloantips.com.
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