by Katerina Nikolas

Created on: February 10, 2010   Last Updated: February 11, 2010

Loans have been commonplace for centuries, as they work to the benefit of the two parties involved in the loan transaction. The one advancing the loan makes a profit on lending funds by charging interest, and the borrower attains the pot of cash he needs, usually to obtain something beyond his current means.

The loan industry now is mainly in the domain of the bankers and is highly regulated. A loan works quite simply. The person requiring funds approaches the lender and terms are agreed, with a binding contract signed. A borrower takes a loan for a fixed amount of money (the principal) and the banker applies a charge (interest) to the principal, to make it worthwhile for the banker to extend the loan. Thus as a basic example someone will borrow $1000 and repay in total $1100. It costs $100 in interest charges and the banker gains $100 on the money he lent. The usual terms of a loan are that a time period is set, and the money is repaid at monthly intervals until the principal and interest are repaid in total.

The most usual form of bank loans taken by individuals are to purchase a house or a car, as these items are too expensive to pay for with cash. Regulations prevent banks from charging usurious rates of interest, but they do have the right to charge for any late payments made. In order to obtain such a high loan as that needed for a house or car a credit check will be done on the borrower to see that his record is good, and that previous financial dealings have been handled in a responsible matter.

Collateral will also be necessary in case the borrower is unable to meet the payments due to a change in personal circumstances, so the house or car will still technically belong to the bank until the loan is repaid in full. This is a secured loan. If payments are defaulted on the bank has the right to sell these assets to recoup the loan, by repossessing the goods. A house will typically be the most expensive purchase a person makes in their life, but borrowing the money is a good investment as the value of the house will appreciate as it is being paid for.

Unsecured loans are generally for smaller amounts and shorter terms. Online loans proliferate on the internet now as an easy source of borrowing. Some of them have very high interest rates applied and one should be wary of over extending on these types of loans, which include payday cash loans, and usually taken when cash is short between pay checks.

Loans taken for other reasons include student loans, which are an investment in education for the future, with the hope of better job prospects to help to repay the loan advanced. Student loans are non dischargeable which means that even if the borrower meets financial difficulties which lead to bankruptcy the loans still have to be repaid.

Personal loans are also used for such things as house renovation. One of the most popular uses of personal loans is for debt consolidation; one loan is taken to pay off all other outstanding debts, such as credit cards. This is done so that the consolidation loan becomes the only loan to service, presumably on a more advantageous interest rate than that of the other combined debt.

All loans are debts until they are paid off in full, and if not dealt with responsibly the lender has the legal right to use debt collectors and take legal action against the borrower. Misuse of loans will also lead to the more legitimate lenders not wanting to have any future dealings with the borrower, as the borrower’s reputation will precede him. Remember that loans can be an investment for the future if used for essential things such as a mortgage, but if used for more fripperous purposes can be a costly mistake.

Learn more about this author, Katerina Nikolas.
Click here to send this author comments or questions.