DEFINITION of 'Loan'
The act of giving money, property or other material goods to a another party in exchange for future repayment of the principal amount along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as open-ended credit up to a specified ceiling amount.In finance, a loan is a debt provided by an entity to another entity at an interest rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.
BREAKING DOWN 'Loan'
The terms of a standardized loan are formally presented to each party in the transaction before any money or property changes hands. If a lender requires any collateral, this will be stipulated in the loan documents as well.
Loans can come from individuals, corporations, financial institutions and governments. They are a way to grow the overall money supply in an economy as well as open up competition, introduce new products and expand business operations.
Conventional Loans
Conventional loans are mortgage loans from mortgage lending institutions not backed by an agency of the government such as the U.S. Department of Veterans Affairs or the Federal Housing Administration. Conventional loans can be either conforming or non-conforming.
Conforming Loans
A conforming loan conforms to the guidelines set by Fannie Mae and Freddie Mac. The main guideline is the maximum loan amount. This amount can vary depending on the home’s location—for example, a house in a high-income area can be eligible for a larger loan than one in a general income area.
Non-Conforming Loans
Non-conforming loans do not conform to the qualifications and guidelines set by Fannie Mae and Freddie Mac corporations.
Secured Loans
With a secured or collateral loan, you leverage personal property to obtain the loan. If you default, the property is transferred to the lender.
The interest rate and loan amount can vary depending on the value of the property you leverage. Generally, higher value property can get you a larger loan and possibly a better interest rate, although other factors—such as loan length and credit history—will also be taken into consideration.
Common examples of personal property used to secure a loan include these possessions:
Unsecured loans are not backed by collateral, so the interest rate and size of the loan is determined by your credit history and income. Unsecured loans are also known as personal or signature loans.
If you have a good income, sterling credit and a solid payback plan, these can be a good option.
Open-ended Loans
Open-ended loans are loans with a fixed-limit line of credit that can be borrowed from again after they have been repaid. Credit cards are one type of open-ended loan.
Homeowners renovating their home may want to consider this option to fund the project.
Close-ended Loans
Closed-ended loans are loans that cannot be borrowed from again, like student loans, mortgages and car loans. The loan decreases with each payment. If you want more credit, you have to apply for a new loan. If you need a set amount of money and nothing more, this is a common way of doing so.