Loans Archives - Page 7 of 11

Loans

DEFINITION of ‘Loan’

A loan is money, property or other material goods that is 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.

BREAKING DOWN ‘Loan’

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. A common loan for American consumers is a mortgage – a loan taken out to purchase a property.

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.

The Difference Between Secured Loans and Unsecured Loans

Loans can be secured or unsecured. Mortgages and car loans are secured loans, as they are both backed or secured by collateral.

Loans such as credit cards and signature loans are unsecured or not backed by collateral. Unsecured loans typically have higher interest rates than secured loans, as they are riskier for the lender. With a secured loan, the lender can repossess the collateral in the case of default. However, interest rates vary wildly depending on multiple factors.

Revolving vs. Term Loans

Loans can also be described as revolving or term. Revolving refers to a loan that can be spent, repaid and spent again, while term refers to a loan paid off in equal monthly installments over a set period called a term. A credit card is an unsecured, revolving loan, while a home equity line of credit (HELOC) is a secured, revolving loan. In contrast, a car loan is a secured, term loan, and a signature loan is an unsecured, term loan.