Loan

A loan is when certain quantity of money is given to another person in exchange for the value or main amount being repaid at a later date. In many circumstances, the lender increases the principal value by adding interest or finance charges, which the borrower must pay in addition to the principal sum.

Loans may be made for a predetermined, one-time sum or as an open-ended line of credit with a cap up to a certain amount. In addition to secured and unsecured loans, there are also commercial and personal lending options.

Key Points

  • A loan is when money is lent to another person with the understanding that it would be repaid, along with interest.
  • Before agreeing to provide a borrower a loan, lenders will take into account the borrower’s income, credit score, and degree of debt.
  • A loan may be unsecured, like a credit card, or it may be secured by property, like a mortgage.
  • While term loans are fixed-rate, fixed-payment loans, revolving loans or lines can be used, repaid, and used again.
  • Risky borrowers may be subject to higher interest rates from lenders.

Get to Understand a Loan

A loan is a type of debt that a person or other entity incurs. The lender advances the borrower a certain amount of money, typically on behalf of a business, financial institution, or government. The borrower accepts a specific set of terms in return, which may include any financial costs, interest, a repayment schedule, and other requirements.

The lender may occasionally need collateral to protect the loan and guarantee repayment. Bonds and certificates of deposit can also be used as collateral for loans (CDs).

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