03: Facts on loans

If you pick up a dictionary and look up the word "loan", you will learn that the word is broadly defined as something that is lent temporarily on stipulation of its reimbursement.

In the business world, the word is usually used to refer to monetary loans, in which a person lends money to a borrower at a predefined cost. This cost comes in the form of an interest rate, which is - to put it simply - the price the lender charges on the use of his money, and is the added amount which must be repaid along with the original borrowed sum. When a loan is taken out, the terms are first agreed and finalized on a formal document, after which the borrower receives all the money as a lump sum. This money is then paid back in monthly installments along with the interest rate, which is determined by a number of factors, including size, type of loan, and credit history. In the long run, even with the additional interest, borrowers end up gaining because of the rising inflation which pushes down the value of money.

There are a number of types of loans that are available in the market, based on where the loan is being acquired and what the conditions of the loan are.
Secured loans are loans where the borrower offers his house or other valued possessions as collateral to the lender, which may be seized if the borrower fails to return the agreed amount of money in a timely manner. Secured loans are very risky in the sense that the borrower stands to lose a lot; they are popular because of a number of advantages including a low interest rate, along with a long period of repayment with lower monthly installments, since the lender is not worried about losing his money. Secured loans are also widely available from a number of financial institutions, and it's also easier to borrow large amounts even with a bad credit history. These loans are very useful and can be used for a number of purposes including debt consolidation.

Unsecured loans on the other hand are loans in which nothing physical is offered as collateral, but are supported by a high credit score, which aims at providing the same assurance a collateral does. Before making a loan, the lender always examines the financial standing and credit reports of a borrower so as to gain assurance that he/she is capable of returning the loan with interest. This is one of the reasons why unsecured loans are harder to obtain, and almost impossible to acquire for people with a tainted credit record. Since the lender is in the high-risk section of the deal, these loans are usually accompanied by high rates of interest, shorter repayment plans and high monthly installments - which means that they are more costly than secured loans. The advantage in getting an unsecured loan is that since no property or holdings need to be evaluated, there is less documentation and the loans can be acquired almost instantly if the borrower is deemed ok.

Generally, loans can be acquired through a number of methods, ranging from borrowing from friends and relatives; banks and other financial institutions to pay-day loan systems, special loan banks and credit unions, amongst other available options.