What exactly is a loan?
When money is lent to a person or organization, it is said to be a loan; 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. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; when payments are made can vary, but they are normally at the same time each month.
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. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. Others will repay the debt in equal installment with the interest as part of this amount.
Whilst financial establishments can play many roles, this is the most frequent way in which they are used. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. this is the simplest and most reliable means to raise finance.
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. 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; 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. 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.
Unsecured loans are much more commonplace although most people do not actually recognize what they are; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. 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.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also 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. Always remember to look carefully at the small print of any financial agreement you are about to sign.
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Add comment April 7th, 2008