Connect
To Top

Defining a Loan and the Reasons why Loans Are Obtained

It is not really difficult defining a loan. It is the act of giving money, goods or property to another party in exchange for the same to be returned at a future date along with interest and other financial charges. The concept of advancing loans has existed for thousands of years and is not a new practice.

There could be a number of reasons why an individual would like to borrow money, or goods or services which he or she would like to return after a period of time along with the charges that are imposed. However, the most common reasons for obtaining loans are related to business matters. In many cases even to travel for a vacation to distant places. Loans can also be obtained for the purchase of homes, vehicles and other property which can be used for commercial reasons.

Banks Are Prominent For Advancing A Loan

Banks cannot generate any revenue if they do not advance loans from which they can earn an interest. It is the primary revenue generator for banks that are often taking in deposits. These come from the general public by paying a lower rate of interest and using the money to advance loans for businesses and other reasons at a higher rate of interest. People who desire to obtain a loan for any reason can contact a bank if they can qualify for the stipulations which have been laid down for obtaining loans. The bank will be trying to understand whether the individual is capable of making a repayment and is really credit worthy before deciding to approve the application or reject it. The borrower will be charged an interest for the money borrowed and a period for the repayment will also be scheduled.

Some banks may inquire into why the individual is trying to borrow the money and even request for collateral before the money is advanced. Banks have stringent terms for advancing loans. They rarely hesitate to reject applications altogether if they are unsatisfied with the responses provided by the applicant.

Lending Institutions And Private Lenders Also Offer Loans

The demand for loans is quite high in all parts of the world and America is no exception to this rule. As banks tend to work at a slower pace and impose stringent stipulations lending institutions, private lenders have also begun to offer loans to people that need the money.

Lending institutions work faster and try to compete with banks to corner a major portion of the clients rejected by banks. They do not impose stringent stipulations. The applicant just needs to satisfy the institution that he or she is capable of making a repayment within the stipulated period. Keeping in mind that competition is high in the market lending institutions are also prepared to offer loans at competitive rates of interest as compared to banks.

Private lenders have been in the business of advancing loans to whoever needs them without going through a lot of hassles. They are just interested in understanding whether the money borrowed will be repaid or not. The interest charged on the loans advanced is high and unaffordable and therefore private lenders are preferred by people who need a loan immediately. Often those  unprepared to wait for a period of time for the approval and do not have a credit history worth noting.

Loans play an important role in the economy of any country. They make it possible for people to afford things which they normally wouldn’t be able to unless they obtained a loan for the same. Purchasing a property from their regular income would be impossible for the average individual and real estate developers would not want to hand over properties in return for an agreement to pay the money in about 30 years. This is a task which can be handled by a bank or a lending institution which is in the business of making money by lending money as loans.

People who decide to borrow money for any reason must understand they are responsible for repaying the money borrowed. There are finance charges imposed and should never consider a loan as easy money which can be forgotten after receiving it.

More in Loans & Credit