Loans are usually sums of money that are lent from a person called a creditor to another person or business who becomes the debtor; before the money is made available to the borrower, they will need to sign an agreement which stipulates the repayment terms. The true definition would include, services, products or people (like staff) but for the purposes of this piece it is financial arrangements we are concerned with. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; this is usually in regular monthly installments.

When debts are repaid a charge is added to the sum owed called ‘interest’ which is how the lender can gain from the service he has provided. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. Others will repay the debt in equal installment with the interest as part of this amount.

Acting as the provider is one of the principal tasks for financial institutions. A loan is a simple way for many people and businesses to have a sum of disposable money in the bank (it’s just the amounts that differ); although other money raising methods do exist.

Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; where the car becomes the security for the money lent to the borrower. To ensure that the finance company does not lose money, secured loans on cars are normally short term; usually lasting no more than 5 years, maximum.

Long term financial arrangements designed for individuals and companies to buy real estate is called a mortgage but it can only be used for this purpose. The financial institution is given security however; in this case the title to the house, until the mortgage is paid off in full. This is a much more serious type of situation and one where it is actually possible for the bank to foreclose on the loan if the borrower fails to make repayments; whilst they can reclaim money owed immediately this way, they may also decide to retain the property until a later date.

Unsecured loans are available from financial institutions under many different guises or marketing packages; credit cards, bank overdrafts and other forms of finance all fall into this category. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.

There are many names for it but predatory lending is the most common; used when a company places pressure on a person to use their services in order for the company to have a financial hold on that person. Criticism of some credit card suppliers in a number of countries is also made as they issue cards to individuals at extremely high rates of interest in an underhand attempt to keep them paying off even small balances for a long period. Always remember to look carefully at the small print of any financial agreement you are about to sign.