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All About Loans

7/12/2012 3:31:09 PM | by Anonymous

Loan

A loan refers to a financial transaction that is done between two parties; a lender and the borrower. It is a type of debt in which the lender agrees to give the borrower a certain amount of money known as the principal, with conditions of full repayment adhered to by a contract. A loan is usually provided with the borrower having to pay a certain percentage of the borrowed amount in addition to the basic sum back to the lender. This amount is referred to as the interest on the debt and serves as an incentive to the lender to engage in the transaction. Usually the loan is paid back over a pre-decided period of time in installments, with each installment being the same amount.

 

The terms and conditions for a legal loan are usually spelled out in the form of a promissory note or a contract. These documents help to enforce the obligations and restrictions for both the lender and the borrower. A contract is usually signed before the transaction to ensure that both parties understand all the terms and conditions that govern the agreement. If a borrower is unable to pay the installments on time or the contract is breached on behalf of either party, the other party can take legal actions provided it is stated in the contract. Most financial institutes provide loans to people for various reasons and it forms a principal task for them. Loans can even be in the form of material objects or other types of bonds, but this article would be focusing on monetary loans.

 

Many people tend to avoid taking loans unless the need arises. The reasons can be the fact that loans usually have hidden costs such as finance charges and interest that deter people from taking them up. One should also avoid taking up too many loans as failure to repay these loans could result in bankruptcy. Some instances where people take up loans is when they do not have sufficient money to fund their purchases, such as cars, homes or businesses. Some common types of loans are student loans, business loans or mortgage loans. Each of these classifications are governed by different set of rules and restrictions with variations in the interest gained on the principal sum. A loan can be considered a ‘good debt’ if it is going to benefit the borrower in the future. For example, funding the purchase of a home in a popular district can be a ‘good debt’ as the value of the house is bound to increase. If the value does not increase or drops, it is considered a ‘bad debt’.

 

One could take a loan from a relative, bank or a financial institution. Loans handled by banks or professional lending institutions go through several stages before the loan is approved. The organization may have criteria that the borrower has to meet in order for the loan to pass. For example, the institution may check the borrower’s past credit history, current income status or purpose of the loan can affect its approval. The institution would examine the borrower’s income status to determine if he or she would be able to pay back the money with interest.

 

Some benefits of taking loans can be that loans allow a person to be able to purchase items even if they do not have sufficient money for it. For example one can buy a car or a home without saving up all their life for one. They can then pay back the money on monthly installments. If the borrower is able to successfully pay back the loan amount without any discrepancies, he or she would be able to qualify for larger loans with lower interest in the future. To develop a good relationship with the financial institution, the borrower should also pay back the loan amount with interest within the specified time frame. For different types of loans there may be different time frames. For example a home loan may have a repay period of 10 to 15 years. Adhering to this could be very beneficial to the borrower.

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