What is a Loan

What is a loan? A loan is an agreement between two parties in which one party will agree to loan money to the other with the understanding that the money will be re-payed. There are two parts to a loan, one is the principal balance, or the amount that was loaned, and the interest. Interest is money that is re-payed on top of the loan, and helps a lender make money on the loan itself. If the borrower qualifies for a no-interest financing, or it is otherwise agreed upon, the interest could be waved.

So who can get a loan? A borrower can be anybody who needs money, and there are several reasons why someone could need a loan. A loan will usually be sought for a long term purchase, where the borrower can afford to make regular payments, but could not afford the entire price at once. A loan will typically be sought for any major purchase such as a house, or a car, or student loans to pay for college.

Who can loan out money? Anybody who has extra money to give out is eligible to make a loan. Typically a loan is sought from a bank, or lending institution, but it can be gotten from anybody. Your mom could give you a loan, or your uncle, or the guy on the street could give you a loan, provided that they were willing to do so for you.

What kind of factors go into getting a loan? A bank will look at your credit score, and history, and determine if you can get a loan. If you have failed to pay loans in the past, or have no history at all, you could be paying more interest. Interest is not only how a bank makes money, but it protects them from those who have a shady credit past. If you have ever had anything repossessed, or failed to pay a bill, you might not get a loan. If you get a loan from an individual, you may need to sign a promissory note, or agree to specific terms.

What kind of terms can you expect when you get a loan? Depending on loan type, you may have between 5 years, and 30 years to pay off your loan. Car loans tend to be 5 years, and mortgages, and student loans you generally pay off over 30 years. However, it all depends on how fast you want to pay, and what kind of rates you can get for the length of the loan. A shorter loan, or a larger loan may qualify you for lower interest rates because it helps get the deal done.

So those are the basics of a loan. A loan is basically just a money transaction that will one day reverse itself, meaning one person gives money today, but will get that money back tomorrow. A loan is good for anyone who needs cash right away, and can repay that cash later, so that they can get what they need today.