Any person borrowing money (a loan) is referred to as the 'debtor' and the person lending the money is called the 'creditor'; the borrower must abide by the payment terms by signing an agreement before the funds will be released. Whilst just about anything, product or service can be lent out; the information below focuses on financial arrangements only. The lender will expect full repayment of the amount borrowed within the time frame arranged when the money was lent; 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. 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. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.
The primary use of a financial institution is to arrange finance but they do have many more functions. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; this is the simplest and most reliable means to raise finance.
Arranging a mortgage, whilst a little more complicated, is in essence the same but the use for which it is required is not flexible and the money can never be used for anything other than buying a house or land. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back 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; although selling the property is one option, keeping it as an investment is another. A construction loan is nothing more then a regular mortgage loan with a 12 month construction period added at the beginning of the mortgage period.
Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; in this instance, the car becomes it's own security for the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; it is rare for the period to exceed five years.
Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; credit cards, bank overdrafts and other forms of finance all fall into this category. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. The wise person treads carefully when dealing with financial institutions as they only have one agenda.
