Loans description
A loan is a type of debt. All
material things can be lent but this article focuses
exclusively on monetary loans. Like all debt
instruments, a loan entails the redistribution of
financial assets over time, between the lender and the
borrower.
The borrower initially receives an amount of money from
the lender, which they pay back, usually but not always
in regular installments, to the lender. This service is
generally provided at a cost, referred to as interest on
the debt.
Acting as a provider of loans is one of the principal
tasks for financial institutions. For other
institutions, issuing of debt contracts such as bonds is
a typical source of funding. Bank loans and credit are
one way to increase the money supply.
Secured loans
A mortgage is a very common type of debt instrument,
used by many individuals to purchase housing. In this
arrangement, the money is used to purchase the property.
The financial institution, however, is given security -
a lien on 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, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or
used car may be secured on the car, in much the same way
as a mortgage above, although the duration of the loan
period is considerably shorter, quite often
corresponding to the useful life of the car. Where this
is not, it will be another form of consumer credit.
Unsecured loans
These may be available from financial institutions under
many different guises or marketing packages:
credit card debt,
personal loans,
bank overdrafts
credit facilities or lines of credit
corporate bonds
The interest rates applicable to these different forms
may vary depending on the lender, the borrower. These
may or may not be regulated by law. In the United
Kingdom, when applied to individuals, these may come
under the Consumer Credit Act 1974. |
