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. 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. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; normally repaid in regular amounts, which can be on a monthly, but sometimes three monthly basis.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. 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. 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.
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. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; to recover sums owing to them, they may place it an auction.
In some instances, this method of security can be used when taking out a loan for a car for instance; 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; in this case money lent for a car will have a relatively short repayment period.
The marketing companies are clever at disguising unsecured loans and the vast majority of people do not even realize they probably have them; if you have an overdraft or credit cards for example, this is exactly what these arrangements are. 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. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
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