A loan is a financial arrangement in which one party, typically a financial institution like a bank, lends a certain amount of money to another party, often an individual or a business, with the expectation that the borrowed amount will be repaid with interest over a specified period of time. Loans are a common way for individuals and businesses to access funds they need for various purposes.
Here are the key aspects of loans:
- Principal: The principal is the initial amount of money borrowed. It is the amount that needs to be repaid to the lender.
- Interest: Interest is the cost of borrowing money. It is calculated as a percentage of the loan amount and is added to the principal. Borrowers pay back both the principal and the interest over the loan term.
- Loan Term: The loan term is the period during which the borrower is expected to repay the loan. Loan terms can vary widely, from short-term loans (a few months) to long-term loans (several years or more).
- Interest Rate: The interest rate determines how much interest the borrower will need to pay on top of the principal amount. Interest rates can be fixed (remain constant throughout the loan term) or variable (fluctuate based on a benchmark rate).
- Collateral: Some loans require collateral, which is an asset of value that the borrower pledges to the lender as security for the loan. If the borrower fails to repay the loan, the lender can seize the collateral.