What is a loan? A loan, also called a loan assumption, is a specific type of financial transaction in which a firm or a person exchanges one loan. A typical loan involves a personal loan or a business loan. In doing this, the borrower finances a project or an acquisition. In exchange, the lender finances a debt that he needs to repay over a certain period of time with interest.
Loans can be simple or complex, depending on the needs of the borrower and his circumstances. The most popular example of a loan is a mortgage. A mortgage refers to a promissory note. The note itself becomes a loan since the real estate secures it that it is meant to cover.
Unlike other loans, such as credit cards and personal loans, the lender’s mortgages are issued to the borrowers. This means that the lender holds the ownership rights to the property, while the borrower retains the right to use it. Unlike commercial loans, the value of collateral for mortgages is not determined at the time of issue. Instead, it is calculated when the loan matures, and the value of the collateral is then used to determine the interest rate. The interest rate calculation considers the loan amount, the interest rate, and the loan’s tenure or term. This means that the longer the duration, the more will be the interest rate.
As is the case with most loans, the collateral does not have to be tangible for the lender to obtain legal recourse against the borrower. If the borrower defaults, the lender can sell the collateral to recover his funds. However, he may also choose not to do this and opt to make the payment himself. In this case, both parties stand to lose.
Loans can also be obtained in two distinct forms: simple and compound interest. A simple loan is one in which the lender pays the interest on only the principal. For example, if a borrower had bought a hundred thousand dollars worth of property and had to pay just fifty thousand dollars on it per year, he would receive a simple loan. A compound interest loan is exactly the opposite of a simple loan in that it pays interest compounded on the principal amount. Here, too, the interest is computed based on the number of months it takes for the principal to be repaid.
Since there are different types of loans, their specific terms vary. Some examples of common types of loans include home equity loans (also known as second mortgages), personal loans, payday loans, and car loans. Another type of loan is referred to as an unsecured loan, which involves the submission of collateral. But in this instance, the collateral is not actually “planted” with the lender – rather, it is handed over to him with the promise to return it if the loan gets repaid.
One type of loan that many people have difficulty understanding is called a “closed-end loan.” A closed-end loan is when the borrower receives a final balloon payment at the end of the term. These loans are often used by people who have decided to sell their homes or otherwise get into financial difficulty. While there are times when a closed-end loan may be the best option available to a borrower, they are also among the most difficult to understand.
Closing costs are one more area where many people get into trouble when understanding what a loan is? In short, closing costs are the total amount of money that a lender must pay to take back the security given to secure a loan term. Closing costs are calculated based on the loan’s outstanding balance plus any fees that the lender has agreed to pay as part of the loan process. Many borrowers try to inflate these costs to get the loan approved – and in many cases, the lender will reject their application because they do not fully disclose these expenses to the lender. Be sure that you fully understand all fees and interest that will be charged to you before you sign on the dotted line! For more details and clarifications, go to www.scamrisk.com.