|
Money advanced
to a borrower, to be repaid at a later date, usually with interest. Legally, a
loan is a contract between a buyer and a seller, enforceable under the Uniform Commercial Code in most states. The terms and conditions for repayment of a loan, including the finance charge or interest rate, are specified in a loan agreement. A loan may be payable on demand, in equal monthly installments, or they may be good until further notice or due at maturity. 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. Types of Loan: Secured Loan 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. A Fixed Rate
Mortgage is one in which the rate remains the same across the life of the loan. The advantage is that monthly payments will remain the same. However, if you lock into a higher interest rate, the rate will not change, even if interest rates go down in the future. The lowest monthly payments come from 30-year fixed-rate mortgages. However, these mortgages also take longest to build up equity in your home. Experts recommend a 30-year mortgage if you are planning to stay in your home for several years and want a stable rate. Also common are 15-year fixed-rate mortgages. These loans spread the principal and interest across a 15-year period, after which you have paid off your loan. Because of the shorter term of the loan, you can build up equity in your home at a much faster pace. However, monthly payments are higher than for a 30-year fixed-rate mortgage. Experts recommend a 15-year fixed-rate mortgage if you are planning to sell your home in a few years and want a stable rate. Unsecured Loan 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
|
Loan and Its Types
