A person or body that provides another with a sum of money (loan) is
called the creditor and the person borrowing the sum is called the
debtor; any type of financial arrangement will require the borrower to
enter into an agreement with the lender. 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. 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.
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. One type of arrangement is to have the
interest paid off before the sum so the first few instalments might only
be the interest charges that have been added. More frequently the amount
is repaid in equal instalments, a portion of which is the interest.
The primary use of a financial institution is to arrange finance but
they do have many more functions. For both companies and individuals,
arranging a loan is a way to increase their cash flow for a regular
monthly outlay. although other money raising methods do exist.
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. As
the amount involved is generally much greater, the financing company
which owns the debt retains the titles to the property for the entirety
of the mortgage, only releasing the title when the last payment is made.
If the borrower defaults on the loan, the bank would have the legal
right to repossess the house and sell it; whilst they can reclaim money
owed immediately this way, they may also decide to retain the property
until a later date.
Even small loans can be secured but this generally only happens when
a person has a poor credit history which could be the case of a person
buying a car; where a car is purchased using this method, it becomes the
security for the amount borrowed. 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.
The average person may have a number of unsecured loans or credit
facilities and not even realize it; 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. Criticism of some credit card
suppliers in a number of countries is also made as they issue cards to
individuals at extremely high rates of interest in an underhand attempt
to keep them paying off even small balances for a long period. Try to
remember what has been written here and you might not have too many
problems.
The information, services
and products on this web site are intended for use by residents of the
United Kingdom only. By repaying your borrowing over a
longer term, your overall interest charges will increase. The actual rate available for any product will depend upon
your circumstances. Ask for a personalised illustration.
