Loans
A 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; any type of financial arrangement will require the borrower to enter into an agreement with the lender. Whilst just about anything, product or service can be lent out; the information below focuses on financial arrangements only. Like all debts, a monetary loan entails the gradual payback of the initial sum borrowed over time, between the lender and the borrower; when payments are made can vary, but they are normally at the same time each month.
This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest.
Acting as the provider is one of the principal tasks for financial institutions. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. other ways to raise capital are available but none as easy as this.
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. The financial institution is given security however; in this case the title to the house, until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; they have the option of selling it to reclaim their money or keeping it as an investment.
There is nothing to stop any lender asking for the loan to be secured and this can happen when a car is bought using this method; in much the same way as a mortgage is secured by the house itself. To ensure that the finance company does not lose money, secured loans on cars are normally short term; it is rare for the period to exceed five years.
The marketing companies are clever at disguising unsecured loans and the vast majority of people do not even realize they probably have them; credit cards, a bank overdraft, even a line of credit for instance, are all examples of unsecured lending. The interest rates applicable to these different forms may vary depending on the lender, the borrower and the type of credit supplied.
In some countries, predatory lenders are called loan sharks and it is where they supply money at high interest rates with the sole intention of gaining control over a person. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. Try to remember what has been written here and you might not have too many problems.