Loans
A loan is a type of debt.
All material
things can
be lent but
this article
focuses
exclusively
on monetary
loans. Like
all debt
instruments,
a loan
entails the
redistribution
of financial
assets over
time,
between the
lender
and the
borrower.
The borrower
initially
receives an
amount of
money from
the lender,
which they
pay back,
usually but
not always
in regular
instalments,
to the
lender. This
service is
generally
provided at
a cost,
referred to
as interest
on the debt.
A borrower
may be
subject to
certain
restrictions
known as
loan
covenants
under the
terms of the
loan.
Acting as a
provider of
loans is one
of the
principal
tasks for
financial
institutions.
For other
institutions,
issuing of
debt
contracts
such as
bonds is a
typical
source of
funding.
Bank loans
and credit
are one way
to increase
the money
supply.
Legally, a
loan is a
contractual
promise of a
debtor to
repay a sum
of money in
exchange for
the promise
of a
creditor to
give another
sum of
money.
A 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.
A type of
loan
especially
used in
limited
partnership
agreements
is the
recourse
note.
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