Monetary loan; although in theory it sounds simple

When a sum of money is lent to another with the purpose of it being paid back it is called a monetary loan; although in theory it sounds simple, there is a legal agreement between the lender and the borrower on how the money is to be repaid. Any material item can be lent but this article focuses exclusively on those involving the lending of money. Loans are required to be paid back and this is normally within a period set at the commencement of the contract; the usual repayment method is based around monthly installments but this period can be longer.

This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. One type of arrangement is to have the interest paid off before the sum so the first few installments might only be the interest charges that have been added. Others will repay the debt in equal installment with the interest as part of this amount.

Although this is the main function of all financial institutions, they do have other functions as well. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; other ways to raise capital are available but none as easy as this.

Another common type of debt, particularly in the Western World is a mortgage and is the primary way real estate is purchased, but this is all it can be used for. In this instance, the lender is given security on the money advanced in the form of the title deeds of the house until the debt is repaid in full. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; whilst they can reclaim money owed immediately this way, they may also decide to retain the property until a later date.

Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; in this instance, the car becomes it's own security for the debt. To ensure that the finance company does not lose money, secured loans on cars are normally short term; for cars, this very rarely extends beyond five years.

Unsecured loans are available from financial institutions under many different guises or marketing packages; credit cards, bank overdrafts and other forms of finance all fall into this category. The interest rates vary with the lender and type of credit supplied but credit cards around the world have some of the highest rates of interest, whilst a bank overdraft will typically be much lower in comparison.

In some countries, predatory lenders are called loan sharks and it is where they supply money at high interest rates with the sole intention of gaining control over a person. This is an area where credit card companies in some countries are also criticized as they supply cards at very high rates of interest and add on other spurious charges to the holder. Always remember to look carefully at the small print of any financial agreement you are about to sign.