Exactly how do loan work anyways
April 12, 2008When money is lent to a person or organization, it is said to be a loan; once complete it becomes a legally binding contract. 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; when payments are made can vary, but they are normally at the same time each month.
This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.
The primary use of a financial institution is to arrange finance but they do have many more functions. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; this is the simplest and most reliable means to raise finance.
A mortgage is a very common type of debt and the primary method used by individuals to purchase a house however with this type, the money advance can only be used for the purpose for which it was intended. 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; 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; for cars, this very rarely extends beyond five years.
Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; credit cards, bank overdrafts and other forms of finance all fall into this category. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also 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. The wise person treads carefully when dealing with financial institutions as they only have one agenda.