Types Of Loans
By admin | May 17, 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. 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; the usual repayment method is based around monthly installments but this period can be longer.
All monetary debts consist of two elements: the sum owed and the interest charge for the time during which it is payable over; this is added to the overall amount owed. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. 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. 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. However, in this situation a form of security is needed before the money is lent and the title to the property is the normal method for financial institutions to use; releasing them once the final installment is made. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; although selling the property is one option, keeping it as an investment is another.
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; where the car becomes the security for the money lent to the borrower. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; for cars, this very rarely extends beyond five years.
The average person may have a number of unsecured loans or credit facilities and not even realize it; if you have an overdraft or credit cards for example, this is exactly what these arrangements are. The interest rates vary with the lender and type of credit supplied but credit cards around the world have some of the highest rates of interest, whilst a bank overdraft will typically be much lower in comparison.
On occasion it is has been known for financial companies to apply direct and indirect pressure for someone to use one of their services so that the company will have a hold over the individual; this type of abuse is known as predatory lending. 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. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
Tags:
Topics: Finance Valley |