A loan is a type of debt. All material things can be lent
but this article focuses exclusively on monetary loans. Like all debt
instruments, a loan entails the redistribution of financial assets over time,
between the lender and the borrower.
The borrower initially receives an amount of money from the lender, which they
pay back, usually but not always in regular installments, to the lender. This
service is generally provided at a cost, referred to as interest on the debt.
Acting as a provider of loans is one of the principal tasks for financial
institutions. For other institutions, issuing of debt contracts such as bonds is
a typical source of funding. Bank loans and credit are one way to increase the
money supply.
Secured
A mortgage is a very common type of debt instrument, used by many individuals to
purchase housing. In this arrangement, the money is used to purchase the
property. The financial institution, however, is given security - a lien on the
title to the house - until the mortgage is paid off in full. If the borrower
defaults on the loan, the bank would have the legal right to repossess the house
and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured
by the car, in much the same way as a mortgage is secured by housing. The
duration of the loan period is considerably shorter often corresponding to the
useful life of the car. There are two types of auto loans, direct and indirect.
A direct auto loan is where a bank gives the loan directly to a consumer. An
indirect auto loan is where a car dealership acts as an intermediary between the
bank or financial institution and the consumer.
Unsecured
These may be available from financial institutions under many different guises
or marketing packages:
credit card debt,
personal loans,
bank overdrafts
credit facilities or lines of credit
corporate bonds
The interest rates applicable to these different forms may vary depending on the
lender, the borrower. These may or may not be regulated by law. In the United
Kingdom, when applied to individuals, these may come under the Consumer Credit
Act 1974.
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