Loans are normally, but not always, a financial arrangement where a sum of money is lent to another person; although in theory it sounds simple, there is a legal agreement between the lender and the borrower on how the money is to be repaid. Lending money is the most usual reason but it can also include goods, services and even people but this article is dealing with those of a financial nature. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; normally repaid in regular amounts, which can be on a monthly, but sometimes three monthly basis.

Generally speaking when debts are provided by family members, no charge for this service is made but usually the person providing the money needs to be compensated and this is done by adding an interest charge to the amount owed. Some companies add the interest onto the repayments but make sure this is the first part to be paid so a number of monthly payments might be required before the capital repayment actually starts to be paid. Others will repay the debt in equal installment with the interest as part of this amount.

Although this is the main function of all financial institutions, they do have other functions as well. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; many other cash raising methods exist but this is the simplest.

Another common type of debt, particularly in the Western World is a mortgage and is the primary way real estate is purchased, but this is all it can be used for. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; although selling the property is one option, keeping it as an investment is another.

Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; where a car is purchased using this method, it becomes the security for the amount borrowed. Whilst secured loans can last a considerable time, this is usually as long as it remains possible for the finance company to reclaim costs should they need to sell the item; for cars, this very rarely extends beyond five years.

Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; usually this type of arrangement refers to money, credit cards and bank overdrafts, to name a just a few. The interest rates vary with the lender and type of credit supplied but credit cards around the world have some of the highest rates of interest, whilst a bank overdraft will typically be much lower in comparison.

In some countries, predatory lenders are called loan sharks and it is where they supply money at high interest rates with the sole intention of gaining control over a person. Criticism of some credit card suppliers in a number of countries is also made as they issue cards to individuals at extremely high rates of interest in an underhand attempt to keep them paying off even small balances for a long period. Always remember to look carefully at the small print of any financial agreement you are about to sign.