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What is a loan and how do loans work?

Where a person or company borrows money from another with the intention of paying this amount back, the money is said to be on loan; when money is lent in this manner, the debtor must abide by the repayment terms set by the creditor. Lending money has been around since it was invented although people and other goods or services have been lent to others for longer but as the majority of these are for money; this is what this article is about. 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; the usual repayment method is based around monthly installments but this period can be longer. This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest. Whilst financial establishments can play many roles, this is the most frequent way in which they are used. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. this is the simplest and most reliable means to raise finance. Arranging a mortgage, whilst a little more complicated, is in essence the same but the use for which it is required is not flexible and the money can never be used for anything other than buying a house or land. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. Defaulting on a loan like this could mean that the bank or other lender could repossess the house and then re-sell it; although selling the property is one option, keeping it as an investment is another. 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; in this instance, the car becomes it's own security for the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; it is rare for the period to exceed five years. Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; this can include the credit card, personal arrangements, bank overdrafts and other forms of credit. Although it is difficult to provide any interest rates as they will differ greatly from one bank to the next, if you want to lose the highest interest rate unsecured debt you have: cut up those store cards. Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.