Loan is an agreement of giving money (property or other material goods).

The most popular loans are money loans that proposed by banks or financial institutes to individuals or organizations (named as borrower). Due to a loan agreement, the borrower can receive some amount of money (or some amounts by accepted schema of payment) for the negotiated term of loan. This borrower should repay the amount and interests till the end of term of loan according to the schema of repayment.

The key elements of the loan are:

• Schema of payment - the loan can be an agreement of giving:
  • a specific, one-time amount, known as a principal amount.

    Usually, the borrower receives a principal amount in their bank account (checking account, current account, etc.). Sometimes, an amount of the loan can be sent to some organization like a car showroom, real estate agency, distributor of some goods or services, etc. Rarely, the amount can be given in cash.

  • an open-ended line of credit up to agreed limit or ceiling amount (revolving loans).

    Usually, the bank opens a loan/credit account with the limit or the ceiling amount, or opens an overdraft for the existing account. The borrower can withdraw any amount up to that limit or ceiling amount during the term of the loan.

    Attention! Be careful, some banks in some countries can charge some fees for:

    • an unused amount of the loan,
    • the maintenance of a loan/credit account or overdraft.
• Term of loan - the terms that was agreed in the loan agreement, during which the borrower should repay all borrowed amount plus interests.

  Attention! Term of loan can be different, usually from 6 months (in some situation even 1 night) to 30 years (sometimes even more). But, there are rules when the borrower can't pay off the debt ahead of schedule or should pay some fees for every pay off.

• Interest rate - is the amount of interest charged for receiving and using the loan.

  Attention! Be careful, there are a lot of different schemas how banks calculated interests:

  Usually:

  • interests are calculated due per term of loan monthly,
  • in the loan agreement can be fixed annual interest rate (also known as APR - annual percentage rate) - how many you should pay for every year of using that loan. So, the monthly interest rate can be about: fixed in the agreement annual interest rate divided to 12 months.

    For example, you can see 6 % annual interest rate. So, you should pay 0.5% monthly.

  Rarely:

  • interests can be calculated weekly or quarterly,
  • in the loan agreement can be fixed weekly, monthly or quarterly interest rate. So, if you see the monthly interest rate in the agreement, the annual interest rate can be about: fixed in the agreement interest rate multiplied to 12 months. Be very careful!

    For example, you can see just 1% interest rate per month, but it will be 12% per year!

• Schema of repayment - in an agreement should be fixed the schema, how the borrower should repay the principal amount and the interest.

  For example:

  • part of the principal amount with interests should be payed monthly,
  • interests should be payed monthly, part of the principal amount - annually,
  • interests should be payed monthly, part of the principal amount also monthly but starting from the third year of using the loan,
  • etc.

  Attention! Be very careful, there are a lot of schemas then can be charged extra fees or penalties for every unscheduled payment.

See also Types of Loans, Mortgage, A Student loan, A personal loan.

Sure, it is the good rule to avoid any debt, using credit cards or any kind of loan. But nobody knows when and why it can be necessary, a lot of people use loans.

When you sign a loan agreement, be sure that it:

• doesn't contain any application or origination fees, and no prepayment penalties,
• you fully understand the schema of calculating interests (the best way is to have a printed copy of pre-calculated interests and repayments for at least the first year).