Loans are normally, but not always, a financial arrangement where a sum of money is lent to another person; the borrower must abide by the payment terms by signing an agreement before the funds will be released. Lending money is the most usual reason but it can also include goods, services and even people but this article is dealing with those of a financial nature. Loans are required to be paid back and this is normally within a period set at the commencement of the contract; whilst it is possible to make 3 or 6 monthly repayments, the usual time period is one month. 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. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest.

Although this is the main function of all financial institutions, they do have other functions as well. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; 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. Defaulting on a loan like this could mean that the bank or other lender could repossess the house and then re-sell it; to recover sums owing to them, they may place it an auction. In some instances, this method of security can be used when taking out a loan for a car for instance; in this instance, the car becomes it's own security for the debt. Whilst secured loans can last a considerable time, this is usually as long as it remains possible for the finance company to reclaim costs should they need to sell the item; where cars are concerned, this term will only last a handful of years. Unsecured loans are much more commonplace although most people do not actually recognize what they are; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. Every bank and other financial institution has different methods to calculate the interest they charge on unsecured credit but a good rule of thumb is that store cards will be the highest followed by credit cards.

Abuse in the granting of money is known as predatory lending; it usually involves providing cash in order to put the borrower in a position where one can gain advantage over them. This type of lending also takes place with credit card companies around the world who issue credit cards with high charges which take a disproportionate amount of time to pay off; even small balances, just to retain a customer. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.

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