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Articles » Finance » Loans >> View Article
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| A Discussion on Loans |
By:
Rob James II |
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When a sum of money is lent to another with the purpose of it being paid back it is called a monetary loan; before the money is made available to the borrower, they will need to sign an agreement which stipulates the repayment terms. 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.
Generally speaking when debts are provided by family members, no charge for this service is made but usually the person providing the money needs to be compensated and this is done by adding an interest charge to the amount owed. One type of arrangement is to have the interest paid off before the sum so the first few installments might only be the interest charges that have been added. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part 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. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. many other cash raising methods exist but this is the simplest.
Arranging a mortgage, whilst a little more complicated, is in essence the same but the use for which it is required is not flexible and the money can never be used for anything other than buying a house or land. The financial institution is given security however; in this case the title to the house, until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; although selling the property is one option, keeping it as an investment is another.
In some instances, this method of security can be used when taking out a loan for a car for instance; where the car becomes the security for the money lent to the borrower. The duration of the loan period is often considerably shorter, usually corresponding to the useful life of the car; 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/charge cards and bank overdrafts, to name a just a few. The interest rates vary with the lender and type of credit supplied but credit/charge cards around the world have some of the highest rates of interest, whilst a bank overdraft will typically be much lower in comparison.
Abuse in the granting of money is known as predatory lending; it usually involves providing cash in order to put the borrower in a position where one can gain advantage over them. This type of lending also takes place with credit card companies around the world who issue credit/charge cards with high charges which take a disproportionate amount of time to pay off; even small balances, just to retain a customer. Try to remember what has been written here and you might not have too many problems. |
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