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What Is A Loan?

A loan is a debt that is usually required to be repaid. There is a borrower and a lender involved in the loan and most often the loan is repaid with interest. L...

Ernest Senaya Ernest Senaya By Ernest Senaya
13 Feb 2008
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A loan is a debt that is usually required to be repaid. There is a borrower and a lender involved in the loan and most often the loan is repaid with interest. Loans have evolved over the years like any good industry would. Let's take a look at the different types of loans and the terminology involved in getting a loan. All loans are created based on the Annual Percentage Rate or APR for short. This is the interest rate that will be paid on a loan. APR makes it easier for consumers to compare lenders and their loan options. Interest and fees are how lenders make their money. When a loan is created it becomes debt to the borrower. Debt is something that is owed. A debt is usually granted with the borrower expected to pay it back plus interest. There are many different types of debts, but in this article we want to look at loans. Today there are mainly two types of loans, secured and unsecured. A secured loan is most closely associated with a mortgage loan. The lender is loaning money to buy the home with the home itself as security for the loan. If the borrower defaults the mortgage lender can foreclose on the home and use the proceeds to pay back the loan. Car loans can be secured loans as well. This is known as a title loan. As long as the payments are on time the loan is fine. Once the borrower begins to default on their payments the auto lender may reposes the car and sell it to pay off the loan. Since the lender owns the title they have security in the automobile and can do this. An unsecured loan is defined as a loan that is not backed by any collateral. An unsecured loan is a greater risk to the lender and generally requires better credit to receive. Some unsecured loans will require a co-signer who is responsible to pay for the loan if the borrower does not make the payments. Credit Cards are a type of unsecured loans and are revolving charges where interest is charged if the full balance is not paid off each month. Student loans are another type of loan. Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry lower interests than other loans and are usually issued by the government. Often they are supplemented by student grants which do not have to be repaid. Because of the high cost of college, and trade schools most students can qualify easier for a student loan or a parent loan to help pay it back. The Free Application for Federal Student Aid is known as FAFSA. This is a form that can be filled out every year by students (both undergraduate and graduate) and their parents to determine their eligibility for federal student financial aid. In addition, most states and schools use information from the FAFSA to award non-federal aid. The FAFSA consists of numerous questions regarding the student's finances, as well as those of his or her family to determine how much they will qualify for. Along the lines of student loans are Stafford Loans. A Stafford Loan is a student loan offered to students enrolled in American institutions of higher education to help finance their education. The loans are offered under Title IV of the Higher Education Act of 1965 (with subsequent amendments) and are therefore guaranteed by the U.S. Department of Education either directly or through guarantee agencies. In 1988, Congress renamed the Federal Guaranteed Student Loan program the Robert T. Stafford Student Loan program, in honor of Senator Robert Stafford of Vermont, for his work on higher education. Another loan that is gaining in popularity and credibility is a payday loan. A payday loan or paycheck advance is a small, short-term loan that helps who is in need of cash before payday. Payday loans are also sometimes referred to as cash advances, and do not require good credit to get as long as you have a checking account and verifiable income. Many payday borrowers may not able to repay their loans loan in full at their first paycheck. This leads to loan flipping, which is the practice of renewing a loan at maturity by paying additional fees without reducing the balance owed. Pawnbrokers are willing to lend money on the value of something. Before payday loans people who needed money would take something to a pawnshop and trade it for a small amount of money less the fee the pawnbroker kept. When you were willing to repay the pawnbroker you would get your item back. Many pawnshops are full of items that have never been paid back. The pawnshop can sell these and make more money. This is a few different types of loans and the terminology associated with them. Getting a loan today is easier than in the past because of the many different types of loans and lenders available to cater to every type of customer.
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