On Simplifying Loans

Loans can be complicated and misleading. For most it is a financial mystery that takes some effort to decode. Understanding exactly how loans work is very crucial in any financial endeavor, to clear the cloud that seemingly blurs how we look at loans, here is a basic and simple guide.

Basic Concepts about Loans

What: Loans are advances of money or a thing of value made by one party (the borrower) from another party (the lender). The advances come with a promise it would be repaid (the borrower pays the lender).  The payment must be made in an agreed time, if there would be delays, interests would be applied.

An interest is an extra price paid for the money borrowed or used overtime. If the borrower does not pay the amount in time (or takes a longer time) then this interest grows or becomes higher. This way works regardless of who is borrowing or lending. Example, when you open a savings account you are actually lending that money to the bank, and the bank pays you with the interest to use that money. The bank then lends it and collects the interest from those loans at a higher rate.

The difference between what the bank gets in interest from its borrowers and the amount it pays for the savings is the bank’s spread.

Focusing More: if we dig deeper, we will find that loans are actually legal binding contracts between the borrower and the lender. Loans can be classified into two basic types: Unsecured and Secured

Secured loans are secured or backed up by collateral, anything of value can be collateral: boats, homes, cars, money, stock, cattle, crops, bonds and insurance policies with value. The collateral must be of value and must be owned by the borrower, which means he or she has to present a proof of ownership for this.

Unsecured loans, to put simply, don’t have collaterals to secure them. There are also other types of loans, text loan is one example.

What makes up a Secured Loan?

Secure loans are defined by 3 instruments for creating loans. The first one is a the proof of ownership, this is a document that proves the borrower indeed owns the property or the collateral. Real estate deeds, car titles, bill of sales and savings account can be proofs of ownership. The second instrument is the credit agreement, this is a contract stating the terms and conditions of the loan. The agreement shows the date of the loan, the accruing period (the time the when the interest would start running), due date for the payments as well as the amount, and how long the interest would grow. Credit agreements must clearly and boldly show the interest rates as Annual Percentage Rates, and this is under the Federal Law. Annual Percentage Rates refers to the interest rates the borrower has to pay in an annual basis. The credit agreement would be factoring on extra fees that are considered real interests, the frequency the payments are made, and long or short payments. This is in fact a good eay to compare the loan costs as it levels the loans.

The third instrument for a secured loan is a security document. This document shows the lender has a security interest in the collateral or property offered. Financing statements for mortgage for real estate, autos, chattel properties (movable or tangible properties or collateral) and the like are examples of security documents. What the document shows is that the lender has interest in the property or the collateral and can seize it as repayment for the debt.

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