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How Loans Are Defined

Apr 30, 2008
When money is lent to a person or organization, it is said to be a loan; before the money is made available to the borrower, they will need to sign an agreement which stipulates the repayment terms.

Any material item can be lent but this article focuses exclusively on those involving the lending of money. Like all debts, a monetary loan entails the gradual payback of the initial sum borrowed over time, between the lender and the borrower; 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. It is not uncommon for a company to have a policy where the interest is front-loaded and paid first; then the capital sum is paid afterwards. 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.

Most of the time, this is the only contact the majority of people have with financial companies and it is just one of many roles they have; although this is the most important. 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.

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.

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. Defaulting on a loan like this could mean that the bank or other lender could repossess the house and then re-sell it; 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.

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. 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.

In some countries, predatory lenders are called loan sharks and it is where they supply money at high interest rates with the sole intention of gaining control over a person.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. Always remember to look carefully at the small print of any financial agreement you are about to sign.
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