What is a loan?
A loan is defined as a financial product in which one party (lender) assigns an amount of money to another party (borrower), who acquires the obligation to repay it within a certain period of time, together with the agreed interest.
The lender and the borrower may be individuals or legal entities.
There are different types of loans:
- Personal loan: Usually granted to an individual to finance a specific need, such as a trip, studies, etc
- Consumer loans: Similar to the previous ones, they are used to finance durable consumer goods, such as furniture, household appliances or automobiles.
- Loans for companies: Requested by companies to finance production goods, for the start-up of a project, investment in fixed assets, etc
- Mortgage loans: These loans are intended for the acquisition of real estate: housing, business, premises, etc. These loans are secured loans and are usually long-term.
Usually the lender must pay a series of fees associated with the loan, such as the origination fee and the early cancellation fee.
In the loans, the amount borrowed is paid in one lump sum, but the repayment is made in periodic installments. The installments include the repayment of the amount borrowed (principal) and interest.
The parts of a loan are:
- Principal: Amount borrowed.
- Interest: Financial cost of the loan, which is a percentage of the principal amount.
- Installments: Set of periodic payments made to repay the principal and pay the interest.
- Term: Time elapsed from the time the loan is delivered until both principal and interest are repaid.
- Lender: Individual or legal entity that lends the money.
- Borrower: Person who receives the principal and undertakes to repay it together with interest.