What Is a Loan?
The simple definition of a loan is when one organization, individual, or entity lends cash to another organization, individual, or entity. It is a debt that is given to one entity by another with an interest rate, a promissory note that serves of evidence of the principal amount of money borrowed, the date of repayment, and the interest rate charged by the lender.
Loan contracts have different forms and varied terms, whether it’s a simple promissory note between friends and family members, or a more advanced loan such as a vehicle loan, payday loan, mortgage, business loan, or student loan. Credit unions, banks, and other people lend money for important and essential things such as student loans, car loans, and home loans.
Types of Loan
There are any different types of loan because each loan is suited to a specific purpose. There are differences between the different types of loan including the length of the loan, the interest rates and how they are calculated, when payments are due, and a range of other variables.
- Student Loans
Student loans are provided to college students and their families to help them cover the financial costs of higher education. These loans are divided into two primary types: private student loans and federal student loans. It’s best to choose a federal student loan because they generally have low interest rates and their repayment terms are friendlier to borrowers.
Mortgages are loans provided by banks to assist individuals in purchasing a home and other items and pay for them in installments. Keep in mind that a mortgage can be tied to a home, meaning that you can lose the home if you fail to make repayments on time. Mortgages have the lowest interest rates when compared to other loans.
- Vehicle Loans
Vehicle loans are tied to property like mortgages are. They can be used to help you purchase an auto but you can lose the car if you fail to make repayments on time. This kind of loan can be acquired directly from a bank or car dealer. It’s better to choose the car dealer if you value convenience, but they usually come with a higher interest rate; meaning you’ll be paying back a higher overall cost.
- Personal Loans
Personal loans are used to cover personal expenses and generally don’t have a specific purpose. This is why people choose this kind of loan to pay back outstanding debt such as credit card debt and to get a lower interest rate.
- Business Loans
Business loans are provided to entrepreneurs and businesses to help them establish and expand their business. It’s best to get a business loan from the Small Business Administration in the US because they have a range of alternatives depending on what the business needs the loan for.
- Payday Loans
These are short-term, high-interest loans that are used to make it to the next paycheck, making them popular with borrowers that are living from paycheck to paycheck. The government discourages people from getting payday loans because they have high interest rates and costs