For Those that wonder – What is a Loan?

This article will answer the generalized question: What is a loan?

Most people, unless they have been living under a rock somewhere know what a loan is. At leas what a loan from a family loan is.

What is a loan? – in the financial world a loan is a financial product that banks and financial institutions negotiate. It is an amount of money that a bank or financial institution gives you and in exchange you pay them back on a monthly basis. In exchange for loaning you the money you need, the bank or financial institution makes a certain commission on the whole amount. This becomes the banks profit and is the way they create a business for themselves.

Loan products are what produce the most amount of money for a bank, or financial institution, so, they are interested in making as many loans as possible. The only flaw or concern a bank or financial institution has when making a loan is getting paid back. In other words, they need to be as sure as they can be, that they will be paid back in a timely manner.

 

What is a loan? – how can a financial institution be assured of repayment

Herein lays the crux of the matter. A financial institution is never completely sure that they will be paid back, but they need to take every step possible to make sure that they will be.  This means that when you apply for a loan an financial institution will look at your credit history, they will look at whether you are using any collateral(a property or house that guaranties the value of the house). Then they will take that information and decide on what kind of loan they can offer based on your situation.

The more secure they feel a loan is, the better the loan options they will give you. The lower the financial risk you are considered to be the better the loan they will offer you.

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The reverse also applies though. The higher the risk the higher the interest rate you will receive, the less the loan will be, and in general the benefits of the loan will not be the same. This is because the financial institution considers you to be more of a risk, therefore they need to make more money when they are taking a larger risk.

What is a loan? – Different types of loan

 

There are really only two different types of loan and of course there can be several varieties to each type.

Mortgage – This type of loan is only to be used to purchase a house. The amount is paid to the construction company or house owner and you become the new owner of the house. Because of the nature of this type of loan, and because your house guaranties the payment of the loan, these loans tend to have a low interest rate and cover a term from 20 to 50 years.

Personal loans – This includes car financing. This loan is any type of loan used for any purpose. Basically this loan comes in both its secured form and unsecured.

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