Financial Dictionary -> Loans -> Loan

In financial dealings a loan is a type of money debt, of which a lender or creditor lends to a borrower or debtor, which must be paid back to the lender in full with added interest and sometimes fees over an agreed period of time. This can be via monthly installments or one lump sum, depending on the terms of the agreement.

There are many types of loan and normally anything that leaves somebody in monetary debt is considered one. Types of loans include mortgages (specifically for purchasing housing), business loans, credit cards, secured loans and more.

Loans can be taken out by an individual or a business from lenders, most commonly banks and other financial institutions. Unsanctioned lenders are considered illegal loan sharks, who do not conform to the law.

Before a lender agrees to loan borrower money the borrower is subject to a credit check, which is an analysis of the borrower's past financial dealings in order to assess whether they are a risk. Specific companies are given the responsibility of assigning everyone a credit rating or score, which can be obtained by lenders to help them decide if they should give somebody a loan and the likelihood of them paying it back without any issues.

There are two major types of loan. These are secured and unsecured. A secured loan as the name suggests, gives the lender a certain amount of security in order to ensure they get their payment no matter what. This involves the borrower pledging what is known as collateral. This includes any type of valuable asset, usually a house or sometimes a car which can be seized by the lender if the borrower fails to make payments after significant warning. When a lender takes legal action and induces collateral the loan becomes defaulted, or the contract becomes void. This collateral is sold to allow payment to be made.

Conventional loans and mortgages are given an interest rate, which is one of the ways lenders make a profit. An interest rate is a percentage of the total amount borrowed that must be paid on top of the original debt. These can be fixed over the term of the loan or adjustable, meaning they fluctuate with the economy.