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What Is a Loan?

A person's past credit history is almost always considered when applying for a loan.
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  • Written By: Michael Pollick
  • Edited By: Lindsay D.
  • Last Modified Date: 21 September 2014
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A loan is a financial transaction in which one party (the lender) agrees to give another party (the borrower) a certain amount of money with the expectation of total repayment. The specific terms of a loan are often spelled out in the form of a promissory note or other contract. The lender can ask for interest payments in addition to the original amount loaned (principal). The borrower must agree to the repayment terms, including the amount owed, interest rate and due dates. Some lenders can also assign financial penalties for missed or late payments.

Because a loan can contain many hidden costs, such as interest payments and finance charges, many people tend to avoid applying for one until it becomes absolutely necessary. Purchasing a new vehicle or home almost always necessitates some form of financial assistance, whether it be a bank mortgage or a private loan with the seller. Financing a higher education may also require a federally-backed student loan. Interest rates on these types of large transactions can be fixed at the time of the application or may vary according to the federal prime interest rate.

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There is a very important legal difference between a gift and a loan. A very generous relative or friend may give a person $5,000 US Dollars (USD) for car repairs, for example. If there is no expectation of repayment, the money can be considered a gift. The giver could not sue for repayment later in a civil lawsuit. But if the lender designates the money as a loan and the borrower pays back even one dollar, the money can be considered a legal loan and the lender can demand repayment any time. Small claims courts spend much of their time determining whether or not a transaction involving money was a gift or loan. This is why paperwork is essential when making private agreements between friends or relatives.

Most loan applications are handled by banks or other professional lending institutions. They may use any number of criteria to determine if a potential borrower is eligible to borrow money. Past credit history is almost always considered, along with current income and assets. The purpose of the loan may also be a factor — a proven investment opportunity may have more appeal than an unproven idea for a new restaurant. One important consideration is the income to debt ratio of the borrower, and whether or not the borrower afford to pay the money back with interest. Professional lenders essentially "sell" money, so borrowers must realize how much a loan actually "costs" in terms of real dollars and cents.

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sunshine31
Post 5

SurfNturf- Another type of loan is the HELOC or the home equity line of credit. This is a revolving account that works much like a credit card.

Once any amount is drawn on the account, then the payments begin. Sometimes if seeking a mortgage on a second property that happens to be a condo may not go through, this may be an option.

The reason why many of these mortgages are declined is that the condo associations are riddled with debt.

Any condo complex that has a foreclosure rate higher than 10% as well as an owner occupancy rate of less than 50% will be declined.

Banks want at least 50% owner occupants because they feel that renters will not care for the unit like an owner. Many condo complexes fall into the decline area.

Using a HELOC on another property with significant equity can take care of this problem. This would be considered a cash sale.

The only word of caution is that a HELOC is a recourse loan meaning that even if they foreclose on your home the banks have a legal right to continue to seek payment from you. This is different than a traditional mortgage where once it is foreclosed there is no other debt.

subway11
Post 4

SurfNturf-Well I think in the case of the home not appraising, the bank may offer a loan up to the amount of the appraisal, and not a penny more.

In this market with a high level of foreclosures there are some properties that are difficult to determine what the actual market value is.

Foreclosures used to be excluded when conducting appraisals, but because most of the sales of homes are foreclosures these sales have to be taken into account in order to determine the market value of a home.

Also, don’t forget that mortgages also require closing costs which is usually 1 to 2% of the loan amount and includes the appraisal fee, loan origination and potential points.

The points are offered in order to lessen the interest rate for the life of the loan. Each point is usually at least $1,000.

You know Bank Rate offers a site that provides a loan calculator. You can determine not only your monthly payments with various interest rates, but you can also determine when your loan payoff would take place.

This is a great tool because it gives you an idea of what your loan payment should be and can afford so you have a general idea of how much you should ask the bank for your credit loan.

surfNturf
Post 3

Moldova- The banking standards have tightened somewhat and they are being pickier about who they grant loans to. In addition, once you are preapproved for a certain amount, based on your credit profile and income, the bank will only approve the purchase if the property appraises correctly and is structurally sound.

Most banks will not approve a mortgage for a property that does not appraise for what you are offering. In addition, if the property has significant structural damages the property is not eligible for financing. The banks deem properties like this too risky.

Moldova
Post 2

Bobbiallen- I don't know the answer to you question.

A bank loan is money that is offered as a loan agreement with terms and conditions. This could be a small business loan or a commercial loan, a mortgage loan for home, or a personal loan for a car.

The loan agreement stipulates the term on the number of payments owed along with the corresponding interest rate.

The better your FICO score, the lower the interest rate. Loan payments can also be drafted directly from your account so that you don’t have to worry about forgetting to make payments.

Sometimes a finance company or a loan company will offer a bank loan. I know that with a mortgage loan there are additional requirements.

First, the borrower has to have a certain down payment. Most banks today are looking for at least 20% down on the property. If this is not satisfied, then PMI or private mortgage insurance is required which results in an additional monthly expenditure.

In addition, a mortgage loan requires a certain

credit score which should be in the 700’s.

Bobbiallen
Post 1

A friend wants to borrow money and pay us back in july. The only thing he can offer is his life insurance policy as an guarantee. Is this an asset and how do we go about it to make it security for our money to be repaid? Bobbiallen

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