A loan is both a transaction that takes place where a borrower obtains assets from a lender and a debt. Following a loan, over time the lender recovers payments from the borrower typically up to and beyond the value of the original loan. The loan thus involves the redistribution of financial assets between the lender and the borrower.
The amount of money lent to the borrower by the lender is called the principal. The borrower is required to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount.
Beyond the principal, interest on the loan is usually charged to the borrower to cover the lenders costs and profits form the transaction. These profits are the incentive for the lender to engage in the loan. Often loans are taken for loan consolidation, or to consolidate other loans.
Legal loans have obligations and restrictions that are enforced by contracts. The contracts typically place the borrower under restrictions known as loan covenants.
Financial institutions are the most popular loans providers, this being one of their major business activities.
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