Loans are normally, but not always, a financial arrangement where a sum of money is lent to another person; when money is lent in this manner, the debtor must abide by the repayment terms set by the creditor. 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. Loans are required to be paid back and this is normally within a period set at the commencement of the contract; whilst it is possible to make 3 or 6 monthly repayments, the usual time period is one month.
This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. 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. 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. 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; other ways to raise capital are available but none as easy as this.
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. Defaulting on a loan like this could mean that the bank or other lender could repossess the house and then re-sell it; whilst they can reclaim money owed immediately this way, they may also decide to retain the property until a later date.
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. In this instance the life of the loan will not exceed the useful life of the vehicle; for cars, this very rarely extends beyond five years.
Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. 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.
There are many names for it but predatory lending is the most common; used when a company places pressure on a person to use their services in order for the company to have a financial hold on that person. 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. Always remember to look carefully at the small print of any financial agreement you are about to sign.
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