Loan

From Wikipedia, the free encyclopedia

For other uses, see Loan (disambiguation).

A loan is a type of debt. All material things can be lent but this article focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.

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. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.

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.

1 Types
- 1.1 Secured
- 1.2 Unsecured
2 Abuses
3 References
4 See also

[edit] Types

[edit] Secured

A mortgage loan 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.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

[edit] Unsecured

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

The interest rates applicable to these different forms may vary depending on the lender, the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

[edit] Abuses

Abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorised, it could be considered a loan shark.

Credit card companies in some countries have been accused by consumer organisations of lending at usurious interest rates^{[citation needed]}.

[edit] References

This does not adequately cite its references or sources.
Please help improve this article by adding citations to reliable sources. (help, get involved!)
Any unsourced material that has been or is likely to be challenged may be removed at any time.
This article has been tagged since June 2006.