Loans

Loans are a form of financial instrument that involves the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt until it is repaid, as well as to repay the principal amount borrowed.

The document evidencing the debt (e.g., a promissory note) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.

Types of Loans

Loans can be categorized in various ways, including:

• Secured loans: Loans that are protected by an asset or collateral. If the borrower defaults, the lender can take possession of the asset used as collateral.
• Unsecured loans: Loans that are not protected by collateral. Interest rates for unsecured loans may be higher due to the higher risk to the lender.
• Mortgage loans: Specific type of secured loan where the collateral is real estate property.
• Personal loans: Loans that can be used for personal, family, or household purposes. They can be either secured or unsecured.
• Payday loans: Short-term, high-cost loans that are typically due by the borrower's next payday.
• Student loans: Loans offered to students to help cover post-secondary education expenses.

Interest Rates

The interest rate on a loan is the amount charged by the lender to the borrower for the use of assets, expressed as a percentage of the principal, and is noted on an annual basis known as the annual percentage rate (APR). Interest rates can be fixed or variable.

Repayment

The terms of loan repayment are agreed upon by the lender and the borrower at the outset. Repayment can occur in various forms, such as:

• Lump sum payment at a specified date
• Regular payments (monthly, quarterly, annually, etc.)
• Revolving credit, similar to credit cards, where the debt can be repaid and borrowed again

Regulation and Legislation

Loans are subject to various laws and regulations to protect consumers from unfair lending practices. These may include caps on interest rates, requirements for clear documentation of loan terms, and the right to rescind the loan within a certain period.

See Also

• Debt
• Credit
• Interest
• Mortgage law