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Personal Loans
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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 installments, 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.
Unsecured Loans
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, 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.
Abuses
Predatory lending is one form of abuse in the granting of
loans. It usually involves granting a loan
in order to put the borrower in a position that one can
gain advantage over him or her. Where the moneylender is
not authorised, it could be considered a loan shark.
Usury is a different form of abuse, charging excessive
interest. In different time periods and cultures the
acceptable interest rate has varied, from no interest at
all to unlimited interest rates. Credit card companies in
some countries have been accused by consumer
organisations of lending at usurious interest rates and
making money out of frivolous "extra charges"
Abuses can also take place in the form of the customer
abusing the lender by not repaying the loan or with an
intent to defraud the lender.
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