Loans

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; before the money is made available to the borrower, they will need to sign an agreement which stipulates the repayment terms. Lending money is the most usual reason but it can also include goods, services and even people but this article is dealing with those of a financial nature. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; normally repaid in regular amounts, which can be on a monthly, but sometimes three monthly basis.

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.

Although this is the main function of all financial institutions, they do have other functions as well. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; this is the simplest and most reliable means to raise finance.

Another common type of debt, particularly in the Western World is a mortgage and is the primary way real estate is purchased, but this is all it can be used for. In this instance, the lender is given security on the money advanced in the form of the title deeds of the house until the debt is repaid in full. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; 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; in this instance, the car becomes it’s own security for the debt. 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; for cars, this very rarely extends beyond five years.

Unsecured loans are available from financial institutions under many different guises or marketing packages; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. Although it is difficult to provide any interest rates as they will differ greatly from one bank to the next, if you want to lose the highest interest rate unsecured debt you have: cut up those store cards.

On occasion it is has been known for financial companies to apply direct and indirect pressure for someone to use one of their services so that the company will have a hold over the individual; this type of abuse is known as predatory lending. 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.