What is a loan? A loan is essentially where an individual, a group of people or a company or business obtains a fixed amount of money from a third party which will be paid back in such as regular instalments or in full at a later date. There are many different types of loan, of course, dependant chiefly upon the individual or group which the money is loaned to and the purpose of the loan.
When most of us think of a loan, it is likely that we will think of what is called a personal loan. This is a loan which is obtained from a bank or finance company and is paid back via regular monthly instalments. A rate of interest will be applied to the loan and the monthly repayments will reflect these interest payments. In the first instance, the monthly repayments are likely to consist chiefly of interest with the balance being redressed as the term of the loan progresses. Personal loans may be for such as to buy a new car, to take a vacation or holiday or to perhaps buy new furniture for the home. Personal loans are available for a wide variety of purposes.
Strictly speaking, a mortgage or a loan otherwise secured on the property of the borrower is also a type of loan. There are many types of mortgage in particular, some of which will see the borrower pay only interest during the term of the loan, with an investment policy to which they also are contributing designed to repay the capital at the end of the mortgage period. Defaulting on a mortgage or other loan secured on property could see the property repossessed by the lender if the arrears are serious enough.
A loan may be obtained by a business in order to perhaps expand in to new premises or purchase new equipment necessary to the running of the business. These loans are also generally secured on the business and default on same may well have a similar effect as defaulting on a mortgage or home loan, where the assets of the business would be seized by the lender.
A loan is also technically still a loan when it is an informal arrangement between family or friends. These loans are likely to be of a small amount, where an individual finds themselves short of ready cash in the short to medium term. These loans are usually arranged in the sense that the money will be paid back in full at a later date and more often than not interest is not charged upon them.
The most dangerous type of loan is where an individual obtains same from an illegal money lender. These loans are also likely to be the most expensive This is likely to be where the individual is so desperate and has no alternative that they are likely to accept whatever terms they are offered. Defaulting on this type of loan could in the short term see the already extortionate rate of interest further increase and in the long term could even see the individual threatened with physical harm.
Loans therefore come in many different forms and the reality is that most of us have the requirement for some form of loan at one time or another in our lives. It is important, however, that we assess our requirements for the loan and ensure that we select the best type for our purposes.