Where a person or company borrows money from another with the intention of paying this amount back, the money is said to be on loan; 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. 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; the usual repayment method is based around monthly installments but this period can be longer.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. More frequently the amount is repaid in equal installments, a portion of which is the interest.
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. Bank loans and credit are one way to increase a person’s or company’s money supply; other ways to raise capital are available but none as easy as this.
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. With this type of loan, should the borrower fail to make payments on the loan or default, then the bank or other financial institution has the right to sell 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 this instance, the car becomes it’s own security for the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; usually lasting no more than 5 years, maximum.
The marketing companies are clever at disguising unsecured loans and the vast majority of people do not even realize they probably have them; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.
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. 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. Take a step back before you sign any financial agreement.
