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A loan is a type of debt. All material things can
be lent but this article focuses exclusively on monetary loans. Like all debt
instruments, a loan entails the redistribution of financial assets over time,
between the lender and the borrower.
The borrower initially receives an amount of money from the lender, which they
pay back, usually but not always in regular installments, to the lender. This
service is generally provided at a cost, referred to as interest on the debt. A
borrower may be subject to certain restrictions known as loan covenants under
the terms of the loan.
Acting as a provider of loans is one of the principal tasks for financial
institutions. For other institutions, issuing of debt contracts such as bonds is
a typical source of funding. Bank loans and credit are one way to increase the
money supply.
Legally, a loan is a contractual promise of a debtor to repay a sum of money in
exchange for the promise of a creditor to give another sum of money.
Secured
A mortgage loan is a very common type of debt instrument, used by many
individuals to purchase housing. In this arrangement, the money is used to
purchase the property. The financial institution, however, is given security - a
lien on the title to the house - until the mortgage is paid off in full. If the
borrower defaults on the loan, the bank would have the legal right to repossess
the house and sell it, to recover sums owing to it.
Unsecured
These may be available from financial institutions under many different guises
or marketing packages:
credit card debt,
personal loans,
bank overdrafts,
credit facilities or lines of credit
corporate bonds
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