Basic understanding of loans

A loan is a type of debt instrument. Like all debts, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the person who borrow assets initially receives or borrows an amount of money from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time.

Usually, the money is paid back in regular basis and each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which gives an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions are enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Usually financial institutions are the main provider of loans. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

Types of loans

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a house or other property) as collateral for the loan.

Also called mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security - a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

Unsecured

Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

* credit card debt
* personal loans
* bank overdrafts
* credit facilities or lines of credit
* corporate bonds

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.
Demand

Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.

source: Wikipedia
* credit card debt
* personal loans
* bank overdrafts
* credit facilities or lines of credit
* corporate bonds