|
A loan is a type of debt and usually refers to one involving a cash sum paid to the borrower by the lender; although in theory it sounds simple, there is a legal agreement between the lender and the borrower on how the money is to be repaid. Lending money has been around since it was invented although people and other goods or services have been lent to others for longer but as the majority of these are for money; this is what this article is about. Like all debts, a monetary loan entails the gradual payback of the initial sum borrowed over time, between the lender and the borrower; this is usually in regular monthly installments.
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. 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. 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.
A mortgage is a very common type of debt and the primary method used by individuals to purchase a house however with this type, the money advance can only be used for the purpose for which it was intended. The financial institution is given security however; in this case the title to the house, until the mortgage is paid off in full. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; they have the option of selling it to reclaim their money or keeping it as an investment.
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 a car is purchased using this method, it becomes the security for the amount borrowed. The duration of the loan period is often considerably shorter, usually corresponding to the useful life of the car; in this case money lent for a car will have a relatively short repayment period.
Unsecured loans are much more commonplace although most people do not actually recognize what they are; 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. 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. Always remember to look carefully at the small print of any financial agreement you are about to sign.
Click here for more information.
|
