What is a loan?
The term loan is translated into the borrowing of money to a party in exchange for future returns of the total sum, most often with a small interest on top. Loans are agreed upon by all involving parties before any money is advanced. Loans can be a specific one-time amount transferred with a fixed return date or paid back in instalments over a longer period of time.
How does a loan work?
When a person needs to borrow money, he/she applies for a loan to either a bank, corporation, government or private investor. The borrower may be required to provide information in regards to the reason for the loan, their financial history, and other information such as employment and marital status. The decision to actually lend the money is usually taken by institutions based on the individual’s credit score. Based on that, the lender can accept or deny a loan application and must provide a reason should the application be unsuccessful. If the application is successful, both parties must sign a contract that outlines the agreement. The lender then proceeds to advance the payment, after which the borrower must repay the agreed instalments including any additional fees (commission rates).