What is a loan?
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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; this is usually finalized in a binding and legal written agreement that ensures the borrower repays the lender. Any material item can be lent but this article focuses exclusively on those involving the lending of money. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; whilst it is possible to make 3 or 6 monthly repayments, the usual time period is one month.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. For instance, some debts repay the interest first and then once this is cleared, the borrowed sum is gradually repaid. Others will repay the debt in equal installment with the interest as part of this amount.
Most of the time, this is the only contact the majority of people have with financial companies and it is just one of many roles they have; although this is the most important. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. 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; to recover sums owing to them, they may place it an auction.
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; if the person using the money to buy a car defaulted on the money used to purchase it, the car would be sold to repay the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; where cars are concerned, this term will only last a handful of years.
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. 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. 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. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
