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What Is A Loan?

A loan refers to a financial transaction done according to an agreement that allows the lender to give a certain sum of money to another party, called borrower, with an expectation of getting an amount that includes principal and interest on it. The specific term of loan repayment is clearly mentioned in the promissory note or related contracts. The lender asks for the interest which is included in the total payable amount. To get a loan, the borrower must agree to what is written in the agreement paper that details the amount granted, interest rate, repayment terms and due date to make payment. Some loan agreements also contain a clause for financial penalty if payment is missed or delayed.

There are several cases where the borrowers discover hidden charges only when repayment period kicks in. However, such things happen if the borrowers deal with the unscrupulous lenders who dangle low-cost loan offers. This is the reason why most people avoid taking out loans unless they consider it absolutely necessary. Some major financial investments like purchase of home or car makes it necessary to borrow loan so that the gap between the required and received is bridged. These days, education loan is also offered to meet the high expenses of education that is often beyond the affordability of middle class and poor economic bracket.

Loans can be sourced from the banks as well as the private lenders. Interest rate on transaction is of two types – fixed and variable. Fixed interest rate remains the same throughout the period of loan repayment whereas variable interest rate varies from time to time depending on the market condition. Expectation of payment is the main attribute of loan transaction. In absence of such expectation, there will be no difference between loan and gift. If the borrower misses a payment willingly or inadvertently, the lender has the legal right to sue him in the court. This explains why paperwork is so much essential in loan transaction to establish that it is actually a loan and not a gift.

Loan approval is a procedural work that starts with scrutiny of applications. You may have to submit necessary documents as required by the lending house. It depends on the lending institution which criteria it will set up to determine if a borrower can qualify for a loan or not. In most of the cases, credit check-up is a must. Among other considerations, current income and evaluation of asset are worthy a mention. The lender also looks into the purpose of borrowing. A borrower with his proven track record of business success is likely to obtain a loan more easily than one who has just ventured out. A proven track record is an assurance for the lending house that it will get back the dues in time.

Another important consideration for the lender is income to debt ratio. The professional lenders are actually the ‘sellers’ of loan and so the borrowers must calculate the ‘cost’ factor before taking one out.

Peter Christopher

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