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Loan

society Maturity 11-13 Next article →

A loan is a special way people and businesses share money. One person, called the lender, gives money to another person, called the borrower. The borrower must agree to pay the money back later. Usually, the borrower pays extra money called interest. This interest is a reward for the lender. It makes the lending process worth the effort.

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Petrevene 18

Most loans have a written document. This paper is often called a promissory note. It lists the main facts of the deal. It shows the principal amount of money borrowed. It also shows the interest rate and the date for repayment. A legal contract makes sure everyone follows the rules.

There are different ways to set up a loan. A secured loan uses an item as safety. This item is called collateral. If the borrower cannot pay, the lender can take the item. A house is a common example. A loan to buy a home is called a mortgage. If a person cannot pay a mortgage, the bank has a legal right to take the house. A car can also be used as collateral. There are direct auto loans from banks. There are also indirect auto loans through car dealerships.

Some loans are unsecured, which means they have no collateral. Credit cards and personal loans are common types. These can be riskier for the lender. Because there is more risk, the interest rates are usually higher. If a borrower cannot pay, the lender might have to sue them in court. In the United Kingdom, the Consumer Credit Act 1974 helps manage these loans for people. There are also special loans like bridge loans. A bridge loan helps a person buy something new before they sell an old item.

Different groups use loans for different needs. A subsidized loan has lower interest because of a special help. In the United States, college students may get these. No interest grows while they are in school. Some loans are called concessional or "soft" loans. These have very generous terms. Foreign governments might give these to developing countries. Other loans are for big businesses. These are called commercial loans. They use credit ratings instead of credit scores to decide the terms.

Loans also have special rules for taxes in the United States. The Internal Revenue Code and the Treasury Department set these rules. A loan is not considered income when a person first gets it. This is because the borrower must pay it back. However, interest is different. The lender must include interest in their income. It is seen as a profit for them. If a lender decides not to make a borrower pay, that debt discharge is treated as income. This is because the borrower essentially received money.

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