Loan

A loan is a financial commitment between two parties, one of which provides cash or other resources and the other promises to return them according to the principles of urgency, payment and repayment.

Loan explained

Lending, from the point of view of the bank's client, is to borrow money on individual terms, fixed in the contract. It specifies the interest rate and the term in months, the date and amount of the monthly payment, as well as the possibility of early repayment. The borrower pays back the loan gradually, reducing the amount owed to the lender.

A loan can be interest-free, in which case it would be called an installment loan. Such loans are provided by stores, by the state (for example, as a measure to support small businesses), and sometimes by developers.

The main functions of the loan are:

• redistributive;
• emissive;
• stimulating.

Redistributive — credit relations allow the redistribution of free money in favor of those who need it.

Emissive function — the credit facilities in circulation are created by the financial system as a whole, not by an individual bank.

The stimulating function manifests itself in the possibility of the development of production without the availability of its own money.

Forms of Loans

There are different classifications of credit. For example, depending on the source and purpose of the funds are distinguished:

• international;
• state subsidies;
• commercial;
• for individuals and legal entities.

International loans. They are allocated as assistance to countries, as well as large borrowing companies in projects and relations significant for the state.

State subsidies. They are aimed at supporting different sectors of the economy and small and medium-sized businesses in times of crisis.

Commercial loans. Funds or goods of legal entities are given to borrowers to conclude commodity transactions under an installment agreement.

Bank loans for individuals and legal entities. Banks use their own reserves (balances on accounts and deposits) to issue funds at interest.

The first two types are characterized by large volumes and long repayment periods. We often encounter the latter in everyday life.

Types of bank Loans

Loans are classified according to what the money is needed for.

Loans for business development, closing cash gaps and other loans for legal entities.

Mortgage. It is taken out to improve living conditions: to buy an apartment, a plot with a house or to build a dacha. The real estate is mortgaged to the bank. In the case of systematic major breaches of contract it can be lost.

Loan secured by real estate. Allows you to get cash against the security of your existing home or car. The main advantage is that you can get large sums for any purpose, without guarantors. Because these loans are taken for a long term, it's important to thoroughly calculate and arrange everything.

Car credit is a loan for the purchase of a car. In most cases, the car is pledged, so it is necessary to insure it, including obtaining a Hull Insurance policy. Financial institutions usually give such loans at low interest rates.

Consumer loan. Money can be taken out in cash or transferred to the borrower's account. It can be used for any purpose, such as vacations, children's education, or to buy expensive equipment or make repairs. The bank gives out small loans without collateral or guarantors with a minimal set of documents.

Refinancing. It's receiving money from one bank to repay the debt and accrued interest in another. Refinancing allows you to reduce the size of the monthly payment, lower the interest rate, extend the term of the loan or make it more convenient to repay the loan.

Restructuring. If you are going through a difficult life situation, you need to apply to the bank where you took the loan. The terms of your contract can be renegotiated to make it easier to pay back your debt.

Revolving credit cards. You can have a revolving credit card. With a revolving credit card, you can use the bank's money an unlimited number of times within your credit limit - to pay for purchases or withdraw cash. You can use your money for free, but there is usually a fee for servicing the card. It is important to study the terms and conditions of such a loan, as in some cases the grace period, a period during which interest is not charged on the amount of debt, is terminated prematurely.

According to the repayment method, distinguish annuity and differentiated loans. Overpayments to the bank will be the same in both cases, if the debt is repaid according to a schedule of payments.

Annuity payments are always the same. This makes it convenient to plan your budget. The payments consist of unevenly distributed debt, as well as the amount of overpayment. First you repay the interest, and then you repay the principal.

Differentiated repayment system differs in that the amount of monthly installments is initially larger and then decreases. The reason is that the principal is evenly distributed over the whole credit period, and the interest is added to it, which gradually decreases.