A loan could be something tangible, that is also valuable such as money, properties in addition to many other goods that could be forwarded to the needed party for use within a stipulated period of time, by someone owning any of the previously listed riches.
Any loan that is collected, needs to be returned within an agreed period of time, and sometimes the person giving out the loan may charge an additional amount, to compensate the risk and patience he’d employed, known as interest.
However, a loan may be repaid in a recurring manner, until the agreed amount is covered.
Contrarily, it may be repaid as a onetime repayment.
All these depends on what the borrower and the borrowed-from agreed upon.
Someone who’s in need of a loan, and went ahead to secure it is known as a Lender or Debtor, and the loan collected can also be called debt.
Who Can Give Out or Collect a Loan?
Everyone can give out a loan, provided you have what is needed by the other party and anyone can collect a loan as well, provided the loan can be repaid at the agreed period of time.
This means that both individuals and corporations could at one time or the other require to collect or give out loans, depending on their financial circumstances and their intentions.
Many financial institutions, businesses, government agencies at both the national or sub-national levels, sometimes do give out loans to other parties, with the intent of benefiting from the specified interests upon the returns.
Loans are needed by businesses to secure an expansion that’ll easily make them to generate higher incomes, or governments to boost up their economies and also uplift their citizen’s standards of living.
The parties involved in giving out loans usually do that in exchange for additional benefits which may include interests, service charges or other fees, diplomatic resolutions, sympathy, or to achieve many other goals at the end.
Loans could be given on the basis of interest, called interest loans, and other times, it could be free of interests i.e interest-free loans, although interest loans are the most popular among profit makers.
How Does Giving Out Loans Works (Lending)?
Before a loan is being lent out, certain terms are to be met by both the parties, and then the transaction will be proceeded.
The terms that are usually considered prior to executing the transaction includes the interest to be paid/fees, repayment plan/ date, witnesses, guarantees, identification documents, and many other conditions.
Most times, a collateral is also required, and its value usually has to be equated to that of the loan. Other times, one’s public, social, political, or financial status might overrule the need for a collateral in certain cases, while the consent of a written agreement, surety or guarantor might also be considered by the lender.
Depending on the lender, the loan amount, trust levels and many other factors, a loan may be hard to get or easily secured.
However, loans can also be segmented based on the degree of the transaction security, and are categorised into Secure and unsecured loans.
Loans that involve collaterals such as buildings, vehicles, or other assets are risk-free, which are also recognised as secured loans.
In contrast, loans that does not involve collaterals are known as unsecured, because they are riskier than the former.
The unsecured loans usually involve higher interest rates and fees, since the debtors incurs more risks by getting involved in it, and may include signature loans, Internet loans, or credit card loans etc.
Longevity of a Loan Repayment
As stated earlier, the interest rate is determined by different factors, another of which includes the duration at which the loan is repaid.
Many corporations or financial institutions such as banks and governments have flexible loan plans that could last for longer periods of time, but unfortunately, someone may be unable to repay at the agreed period of time.
In such a situation, the loan party may decide to be more flexible by lifting the deadline, or adding a surcharge; an addition to the normal interest planned to be paid, instead of taking a bolder decision that might be at the detriment of the debtor. This is known as a compound interest, because it is an interest in addition to the formerly supposed interest.
However, the situations whereby you were not surcharged, in addition to the normal interest, the situation is simple, and thus not compounded; regarded to as a simple interest.