Loans
Sunday, March 30th, 2008A person or body that provides another with a sum of money (loan) is called the creditor and the person borrowing the sum is called the debtor; normally finalized by a legal document as it is a binding arrangement between the two. Whilst just about anything, product or service can be lent out; the information below focuses on financial arrangements only. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; this is usually in regular monthly installments.
All monetary debts consist of two elements: the sum owed and the interest charge for the time during which it is payable over; this is added to the overall amount owed. It is not uncommon for a company to have a policy where the interest is front-loaded and paid first; then the capital sum is paid afterwards. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest.
The primary use of a financial institution is to arrange finance but they do have many more functions. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. whilst other ways to raise capital can be used, this is often the quickest method.
A mortgage on the other hand is designed for one purpose, that of purchasing property or land and is one of the most common types of long term debt individuals experience. However, in this situation a form of security is needed before the money is lent and the title to the property is the normal method for financial institutions to use; releasing them once the final installment is made. With this type of loan, should the borrower fail to make payments on the loan or default, then the bank or other financial institution has the right to sell the property; to recover sums owing to them, they may place it an auction.
Although not a regular method of security, the financing company may demand that the object of the loan also becomes the security for it; where the car becomes the security for the money lent to the borrower. In this instance the life of the loan will not exceed the useful life of the vehicle; in this case money lent for a car will have a relatively short repayment period.
Unsecured loans are available from financial institutions under many different guises or marketing packages; this can include the credit card, personal arrangements, bank overdrafts and other forms of credit. The interest rates vary with the lender and type of credit supplied but credit cards around the world have some of the highest rates of interest, whilst a bank overdraft will typically be much lower in comparison.
On occasion it is has been known for financial companies to apply direct and indirect pressure for someone to use one of their services so that the company will have a hold over the individual; this type of abuse is known as predatory lending. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.