|
 Loans are
normally, but not always, a financial arrangement where a sum of
money is lent to another person; this is usually finalized in a
binding and legal written agreement that ensures the borrower
repays the lender. Lending money is the most usual reason but it
can also include goods, services and even people but this article
is dealing with those of a financial nature. 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.
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. However the normal way to repay a
debt is to ensure that each monthly repayment combines part sum and
part interest.
Although this is the main function of all financial
institutions, they do have other functions as well. Bank loans and
credit are one way to increase a person's or company's money
supply; this is the simplest and most reliable means to raise
finance.
A
mortgage on the other hand is designed for one purpose, that of
purchasing property or land and is one of the most common types of
long term debt individuals experience. 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; 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. To
ensure that the finance company does not lose money, secured loans
on cars are normally short term; in this case money lent for a car
will have a relatively short repayment period.
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. Typically, interest rates on credit cards or
store cards will be the highest but all unsecured credit rates will
of course vary from one lender to the next.
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. Take a step back before you sign any financial
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