7 Facts About Loans
A loan is an arrangement where money is lent by one person (the lender) to another (the borrower). In theory it sounds simple, there is a legal agreement between the lender and the borrower on how the money is to be repaid. 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. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; 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. 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. More frequently the amount is repaid in equal installments, a portion of which is the interest.
Acting as the provider is one of the principal tasks for financial institutions. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; other ways to raise capital are available but none as easy as this.
Long term financial arrangements designed for individuals and companies to buy real estate is called a mortgage but it can only be used for this purpose. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. This is a much more serious type of situation and one where it is actually possible for the bank to foreclose on the loan if the borrower fails to make repayments; they have the option of selling it to reclaim their money or keeping it as an investment.
In some instances, this method of security can be used when taking out a loan for a car for instance; where a car is purchased using this method, it becomes the security for the amount borrowed. Whilst secured loans can last a considerable time, this is usually as long as it remains possible for the finance company to reclaim costs should they need to sell the item; usually lasting no more than 5 years, maximum.
The average person may have a number of unsecured loans or credit facilities and not even realize it; 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.
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. 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. The wise person treads carefully when dealing with financial institutions as they only have one agenda.
Tags: credit cards, debt, finance, Loans