A person or body that provides another with a sum of money (loan) is called the creditor and the person borrowing the sum is called the debtor; this is usually finalized in a binding and legal written agreement that ensures the borrower repays the lender. Any material item can be lent but this article focuses exclusively on those involving the lending of money. 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; the usual repayment method is based around monthly installments but this period can be longer.

The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. For most people repaying a debt, they know that each month, part of the debt is being paid off along with a small amount of interest that has been added to it.

Whilst financial establishments can play many roles, this is the most frequent way in which they are used. Bank loans and credit are one way to increase a person’s or company’s money supply; whilst other ways to raise capital can be used, this is often the quickest method.

A mortgage on the other hand is designed for one purpose, that of purchasing property or land and is one of the most common types of long term debt individuals experience. As the amount involved is generally much greater, the financing company which owns the debt retains the titles to the property for the entirety of the mortgage, only releasing the title when the last payment is made. This security means that defaulting on the loan may leave the lender with no alternative but to repossess the property; 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; if the person using the money to buy a car defaulted on the money used to purchase it, the car would be sold to repay the debt. Car loans are generally much shorter as the useful life of a car is correspondingly reduced; it is rare for the period to exceed five years.

The average person may have a number of unsecured loans or credit facilities and not even realize it; if you have an overdraft or credit cards for example, this is exactly what these arrangements are. Although it is difficult to provide any interest rates as they will differ greatly from one bank to the next, if you want to lose the highest interest rate unsecured debt you have: cut up those store cards.

There are many names for it but predatory lending is the most common; used when a company places pressure on a person to use their services in order for the company to have a financial hold on that 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.