What do you know about Loans?
By admin | April 7, 2008
A loan is an arrangement where money is lent by one person (the lender) to another (the borrower); once the terms have been agreed, a legal contract will need to be signed. The true definition would include, services, products or people (like staff) but for the purposes of this piece it is financial arrangements we are concerned with. Loans are required to be paid back and this is normally within a period set at the commencement of the contract; when payments are made can vary, but they are normally at the same time each 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. One type of arrangement is to have the interest paid off before the sum so the first few installments might only be the interest charges that have been added. More frequently the amount is repaid in equal installments, a portion of which is the interest.
The primary use of a financial institution is to arrange finance but they do have many more functions. 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. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. With this type of loan, should the borrower fail to make payments on the loan or default, then the bank or other financial institution has the right to sell the property; to recover sums owing to them, they may place it an auction.
In some instances, a loan taken out to purchase a new or used car may be secured on the car itself; in this instance, the car becomes it’s own security for 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; it is rare for the period to exceed five 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. Although it is difficult to provide any interest rates as they will differ greatly from one bank to the next, if you want to lose the highest interest rate unsecured debt you have: cut up those store cards.
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. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. The wise person treads carefully when dealing with financial institutions as they only have one agenda.
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Topics: Finance Valley |