A loan is way of debit. Like all other debit mediums, a loan facilitates the redistribution of financial assets overtime between the lender and borrower.
In a loan, a borrower firstly receives or borrows an amount of money, which is called principal, from the lender, and is assured to pay back or repay the equal amount of money to the lender in later time. Typically this money will be paid in regular installments or partial repayment, each installment is the same amount. The loan is obviously provided at a cost, referred to as interest on the debit, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants.
Types of loans
A secured loan is a loan which needs the borrower to pledge some assets (e.g. a car or property) as guarantee for the loan.
An advance loan is a very common type of debit medium, used by many individuals to purchase housing, car etc. In this plan, the money is used to purchase the property. The financial institute, however, is given security — a lien on the title to the house — until the advance is paid off in full. If the borrower fails in refunding the loan, the bank would have the legal right to recover the house and sell it, to get back the sums owing to it.
Unsecured loans are economic loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:
* Credit card debt
* Personal loans
* Bank overdrafts
* Corporate bonds
The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law.
Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.