A loan is a financial transaction in which one party, typically a financial institution or lender, provides money or resources to another party, known as the borrower, with the expectation that the borrowed amount will be repaid, usually with interest, over a specified period of time. Loans are a common method for individuals, businesses, and governments to access funds for various purposes, such as buying a home, starting or expanding a business, or covering unforeseen expenses.
Key components of a loan include:
- Principal: The initial amount of money borrowed, which must be repaid.
- Interest: The cost of borrowing money, expressed as a percentage of the principal, usually calculated annually. Interest is the compensation the lender receives for taking the risk of lending money.
- Term: The period over which the loan is expected to be repaid. Loan terms can vary, ranging from short-term loans (a few months) to long-term loans (several decades).
- Repayment Schedule: The agreed-upon plan outlining how the borrower will repay the loan, including the frequency and amount of payments.
- Collateral: Some loans are secured, meaning they are backed by collateral (assets of value) that the lender can claim if the borrower fails to repay the loan. Unsecured loans, on the other hand, do not require collateral.
- Amortization: The process of gradually paying off the loan through regular installments, which include both principal and interest.
Loans can be obtained from various sources, including banks, credit unions, online lenders, and government agencies. The specific terms and conditions of a loan depend on factors such as the borrower’s creditworthiness, the purpose of the loan, and prevailing market conditions.