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Written by Webmaster
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Sunday, 27 July 2008 |
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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. 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; when payments are made can vary, but they are normally at the same time each month.
When debts are repaid a charge is added to the sum owed called 'interest' which is how the lender can gain from the service he has provided. 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. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.
The primary use of a financial institution is to arrange finance but they do have many more functions. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; 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. 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.
In some instances, a loan taken out to purchase a new or used car may be secured on the car itself; in much the same way as a mortgage is secured by the house itself. In this instance the life of the loan will not exceed the useful life of the vehicle; usually lasting no more than 5 years, maximum.
The marketing companies are clever at disguising unsecured loans and the vast majority of people do not even realize they probably have them; 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. |
