Loan- The Definition

A loan is a type of debt. A borrower receives or borrows an amount of money referred to as ‘principle’ from a lender. The lender can be a bank or any other financial institution that provides this kind of service. The borrower is then obligated to pay back the lender an equal amount of money after a specified time.

Normally the borrower pays back the money in regular installments; each installment is usually the same amount. The bank lends the money to the borrower at a cost referred to as interest. Interest is what keeps the lender in the business. In legal loans, each obligation and restriction is enforced by a contract.

Loans can either be secured or unsecured. A secured loan is where a borrower pledges an asset or assets as collateral. Most people go for mortgage loans when they want to purchase houses or homes. In this kind of arrangement, the money borrowed is used to purchase the property. The lending institution is however given the security, that is, a lien on the title to the property until the mortgage is paid in full. If the borrower defaults, the lending institution has the legal right to take possession of the property and sell it to recover the borrowed money.

Unsecured loans have no collateral. This type of loan is available in several forms. They include credit card debt, personal loans, bank overdrafts, credit facilities and corporate bonds. The interest rates applicable in each of these forms may vary depending on the financial institution. This type of arrangement may or may not be regulated by law.

Mercy Maranga writes content on Finance and Debt Management. Visit her site here for more information on Finance and how to effectively Manage your debts.
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