What is a loan?
A loan is the lending of property, such as money, to a person or an organisation, with a promise to return the cash. A loan can be in the form of a written or oral agreement which typically includes interest rate terms – most lenders charge you for the use of their money. Note: Collecting interest is prohibited in Islamic banking.
The agreement also contains a period of payments. It may be one-off, monthly, or twice a month, depending on the lender and the amount of money.
Types of loans
A secured loan is characterised by an agreement to lend money to a borrower (recipient) coupled with collateral. Collateral serves as security for the refund of a loan. Some common examples of secured loans include:
- Mortgage loan: this type is commonly used to purchase a residential property. Most often, mortgages are issued by financial institutions. The agreement is always a written one. This loan works in a way that the property serves as collateral. Your inability to pay the loan before the deadline means the loss of the house to the financial institution.
- Vehicle loan: this is beneficial when an individual or a company wants to buy one or several cars. In this case, your car is the collateral. If you are unable to pay the loan before the deadline, you will forfeit your car.
For a financial institution to give you a loan, they will have to see your credit history. The advantage of a secured loan is that it's rare for the lender to be in loss.
This loan is characterised by not having collateral attached. If you are unable to pay the money before the stipulated deadline, you won't lose any of your property. Unsecured loans usually have higher interest rates because they are riskier for those who lend money. Examples of unsecured loans include:
- Peer-to-peer lending: this usually means lending between friends or colleagues. In most cases, due to the relationship between these individuals, there is no collateral in the agreement.
- Credit card debt