What is a Loan

A loan is when you extend credit to someone. Someone has just borrowed something from you with a promise to repay at a future date. If I borrow a quarter from someone that is a loan because the game plan is to pay it back in the future according to some reestablished terms and conditions.

Now of course if you are talking about borrowing money from a bank that is most definitely a loan which of course will have different terms and conditions. The term could be 12, 24, 36, 48 or 60 months. The monthly payments and the amount of finance charges paid will be dependent upon the amount of the loan, the interest rate paid, and the term selected for repayment. Some loans, primarily mortgages will charge you a prepayment penalty if you pay the loan prior to the established term. For example if you take out a mortgage loan for 30 years and you inherit a windfall and decide to pay off your mortgage after 2 years then you incur that penalty.

Now some financial institutions will waive the prepayment penalty after a certain amount of time has passed, maybe five years or so.

Loans from financial institutions come with legally binding contracts in place that outline all the terms of agreements, including the amount borrowed, the interest rate, term of repayment, monthly payment. Total amount to be repaid including the finance charges. Contracts will also define certain remedies that will take place if payments are not paid on time or if payments are missed all together. With a mortgage the contract may let you know that your mortgage can be sold to another mortgage company.

If you receive a mortgage loan not only will it come with a contract but it will come with a mortgage document which will be filed with the county recorders office which files a lien against the property that the loan has been taken out against. The mortgage basically puts a lien on the property on the property which has to be paid in the event the property is sold.

It used to be that loans were made with handshakes but as our society has moved to that of a litigious society and your word no longer has the meaning it had in the past , the need for contracts and notes were brought to the fore front.

A loan is not necessarily money. You can loan someone a lawn mower, or car, clothing, shoes, hat, or any number of things can be loaned.