What Is A Loan?

What is a loan? A loan is the act of lending or borrowing. Lending can be done with money, or with items. You can lend someone 5 bucks or you could lend them a cup of sugar. Either way, the general idea is that the person borrowing the money or the item will pay back.

It's a strange fact of life that we don't always have everything that we need and sometimes we lack the resources required to get it. During times like these we might want to consider a loan. If you've never had to acquire a loan you might be confused about what it entails. Anne Reed of Acceptance Mortgage in Sparta, New Jersey described the true meaning of the word "loan" to give us a better idea.


"A loan is the act of lending or borrowing. Lending can be done with money, or with items. You can lend someone 5 bucks or you could lend them a cup of sugar. Either way, the general idea is that the person borrowing the money or the item will pay back the person doing the lending," Reed said.




Now most of us already understand the simple concept of borrowing small items for immediate use, but if you need to borrow a large sum of money for something like a house or a car, you will need to enter into a legal agreement with a financial institution to acquire what is formally known as a loan. Loans through financial institutions have certain rules.

"The lender requires some conditions to the borrowing. After learning more about the potential borrower, the bank will determine the ability for the borrower to repay this loan and what should happen if they don't," Reed said.

When you get a loan through a bank, you can't simply pay back the same amount you borrowed. "If the bank decides to lend the money, they usually want a fee to do so and this is called interest," Reed said. The financial institution you borrow from will set up payments for you that you can afford in order to pay the money back. "Loans have set and specific payment plans. A payment plan is set up using the amount you borrowed, plus the interest, divided by the number of months that you need to pay back the money," Reed said. Making your loan payments on time is essential because most banks charge late fees and may report your late payments to credit bureaus.

If you put some money down up front this is called a "down payment" and this will reduce the cost of your loan and payments. Sometimes a down payment can even help you to secure a loan that you otherwise might not be eligible for if you do not have any previous borrowing experience and therefore a lower credit score.

"Loans come in many shapes and forms and can be used for many things," Reed said. "They can require just someone's signature or they can require collateral."

Collateral is a thing that you own that you agree to surrender to the financial institution in the event that you do not pay back your loan in the specified amount of time.

A loan agreement can last from a few months to many years. Shopping for a loan that suits your needs can be quite a detailed and drawn out process. Ask your mortgage broker, loan officer, or bank representative for advice when considering your borrowing options.

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