Debt Dictionary

Loan

Investment Dictionary -> Loan

The term loan refers to a category of debt in which the lending institution gives funding or property to the borrower. In return, the debtor is obliged to return this property or to repay the outstanding obligations, including the interest on the loan. Typically, there is a specified time period for the loan repayment and the borrower repays his dues in regular installments. On the other hand, the lender bears risk that the borrower may default on his obligations.

In practice, any material item may be lent and borrowed. Secured loans refer to loans that have been guaranteed by collateral such as real estate property or vehicle. Mortgage loans represent a type of loan that are secured by real property such as land and land improvements. In basic terms, persons will borrow money against the predetermined market value of the property which they wish to purchase. In addition, they agree to repay the loan and the corresponding interest to the lender. Car loans are granted to finance the purchase of a new or an old vehicle. In this case, the vehicle itself serves to secure the loan. The loan period encompasses only the useful life of the car. Two types of car loans exist: direct and indirect. Under the terms of direct car loan agreements, the lending institution grants the loan directly to the consumer. The indirect car loans are offered by car dealerships which act in the role of intermediaries between the lending institution and the borrower.

On the opposite, unsecured loans are entirely based on the credit rating of the borrower. This type of loans is cheaper for the borrower but it carries higher risk for the lender. Personal unsecured loans are granted to individuals who carry the sole responsibility for their repayment. Business unsecured loans are granted to legal entities. The business unsecured loan with a personal guarantee is given to businesses. However, if a company defaults on its loan, the individual who acts as a guarantee becomes the payer of last resort. A small portion of the business loans is granted in the form of unsecured credit. Most business loans are secured by the assets of the company, any personal assets, or both. It is important to note that the banking institutions offer loans to businesses which have proven operating histories.

Further along, credit lines refer to specific type of arrangements in which the lending institution grants a certain amount of unsecured credit for an agreed period of time. Credit lines come in various forms such as cash, demand loan, overdraft, and term loan, bad credit loan, among others. In essence, they represent accounts whereby interest is repaid only on the withdrawn amounts of cash. Credit lines are usually extended to valuable customers who seek to overcome liquidity issues. Finally, credit cards allow the purchase of goods and services in return to the holder’s promise to pay them off. Credit cards are typically issued by banking institutions and credit unions. The card holder is obliged to pay a specified minimum amount of the bill at a fixed date or he will be charged a higher amount. Moreover, he is required to pay interest in case that the balance is not paid in its entirety.


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