In economics, a loan is a borrowing of money by one or several persons, companies, institutions, or other organizations to other persons, companies etc. The borrower is then obligated to pay interest on this debt and also to repay the principal amount borrowed and at the same time meet other financial obligations. This sector of the economy constitutes a major part of the total monetary base in most nations. Most loans are unsecured in nature. However, secured loans, which include home mortgages, auto loans, and business loans, are available in the financial market.
A loan takes borrowers on the equity of their property (which represents the value of the property as at the date of purchase). Lenders capitalize on the asset they borrow by making an equal monthly repayment. This implies that the greater the value of the asset, greater is the potential for return. There are various types of loan available to suit varying needs. These loans can be provided by a variety of lenders who can either be private or public, including government organizations.
One such loan is a term loan. A term loan allows the lender to finance a definite amount of time, say a year, at a certain interest rate. Once the term is over, the loan amount is due for repayment according to the terms agreed upon by both the parties. In a normal situation, term loans are renewable every twelve months or when the outstanding balance decreases by the applicable discount. Some lenders may also charge fees for extension of the terms.
Another type of loan is a signature loan. Such loans are issued by third parties – not by the borrower himself. The advantage of this type of loan is that lenders can take collateral to secure the loan amount. This ensures repayment of the loan even if the value of the collateral increases. Signature loans are not subject to any annual percentage rate (APR).
Another form of unsecured loan available to the individual is an installment loan. This is often provided by a financial institution. Financial institutions issue these loans on behalf of a client by collecting payments from him on a monthly basis. The payments are for a specific period which can range from one month to four years. If the full payment period is not met, the financial institution will repossess the goods owned by the borrower.
Another option is a revolving loan. A revolving loan is a kind of loan application where the interest rate of the loan does not change. This is done in order to minimize the financial risk faced by the lender. If the borrower repays the loan earlier than the specified period, he will have to pay higher charges. The terms and conditions of a revolving loan may differ from lender to lender.