A loan is money, property or other material goods given to another party in exchange for future repayment of the loan value amount, along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount.
Loans can come from individuals, corporations, financial institutions and governments. They offer a way to grow the overall money supply in an economy, as well as open up competition and expand business operations. The interest and fees from loans are a primary source of revenue for many financial institutions, such as banks, as well as some retailers through the use of credit facilities.
Everything You Need to Know About Loans
There are various kinds of loans as per the financial requirements in question. Banks can give a loan which can be secured or unsecured. People go for secured loans due to lower interest rates and the large sum of money available which can be used for purchasing a car or house. While unsecured loans are most common in the form of personal loans which have a higher interest rate and are given for smaller amounts for purposes like home renovation and so on.
The maximum loan amount that you can avail is based on the persons’ collateral capacity and credit report. Instruments of credit like credit cards, standard loans, line of credit.
Two active distributions in consumer credit is the open-end and closed-end credit.
The open-end credit, is also known as the revolving credit and this can be used repeatedly for purchases that have monthly pay back, in a setting where paying back the complete due amount every month is not required. A highly used form of revolving credit is the credit card, although home equity loans and home equity lines of credit also belong in this category. On the other hand, a closed-end credit is utilised to finance specific objectives for a given period of time. These are also known as instalment loans since consumers are required to go through a regular payment schedule which is monthly and inclusive of interest charges, until the time principal gets paid off.
How a Loan Works
The terms of a loan are agreed to by each party in the transaction before any money or property changes hands. If the lender requires collateral, this requirement will be outlined in the loan documents. Most loans also have provisions regarding the maximum amount of interest, as well as other covenants such as the length of time before repayment is required.