Loans are usually sums of money that are lent from a person called a
creditor to another person or business who becomes the debtor; any type
of financial arrangement will require the borrower to enter into an
agreement with the lender. 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. Loans are required to be
paid back and this is normally within a period set at the commencement
of the contract; this is usually in regular monthly installments.
This service is generally provided at a cost, referred to as interest
on the debt and it can vary how this is repaid. For instance, some debts
repay the interest first and then once this is cleared, the borrowed sum
is gradually repaid. However the normal way to repay a debt is to ensure
that each monthly repayment combines part sum and part interest.
Acting as the provider is one of the principal tasks for financial
institutions. 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; whilst other ways to raise capital
can be used, this is often the quickest method.
Arranging a mortgage, whilst a little more complicated, is in essence
the same but the use for which it is required is not flexible and the
money can never be used for anything other than buying a house or land.
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.
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.
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. To ensure that the finance company does not
lose money, secured loans on cars are normally short term; where cars
are concerned, this term will only last a handful of years.
Financial companies organize unsecured loans everyday although many
people do not even realize that is what they are being provided with;
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.
Abuse in the granting of money is known as predatory lending; it
usually involves providing cash in order to put the borrower in a
position where one can gain advantage over them. 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.
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.
