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A financial sum of money lent to an individual or company is called a loan; once complete it becomes a legally binding contract. The true definition would include, services, products or people (like staff) but for the purposes of this piece it is financial arrangements we are concerned with. The lender will expect full repayment of the amount borrowed within the time frame arranged when the money was lent; whilst it is possible to make 3 or 6 monthly repayments, the usual time period is one month.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.
The primary use of a financial institution is to arrange finance but they do have many more functions. A loan is a simple way for many people and businesses to have a sum of disposable money in the bank (it's just the amounts that differ); whilst other ways to raise capital can be used, this is often the quickest method.
A mortgage is a very common type of debt and the primary method used by individuals to purchase a house however with this type, the money advance can only be used for the purpose for which it was intended. However, in this situation a form of security is needed before the money is lent and the title to the property is the normal method for financial institutions to use; releasing them once the final installment is made. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; to recover sums owing to them, they may place it an auction.
In some instances, a loan taken out to purchase a new or used car may be secured on the car itself; in much the same way as a mortgage is secured by the house itself. To ensure that the finance company does not lose money, secured loans on cars are normally short term; where cars are concerned, this term will only last a handful of years.
Unsecured loans are much more commonplace although most people do not actually recognize what they are; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. The interest rates applicable to these different forms may vary depending on the lender, the borrower and the type of credit supplied.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. Take a step back before you sign any financial agreement.
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