What is A Loan?

Financial power will cease to exist without the invention of loans. Without them, our global market will be quite different to how they function today. What exactly are loans and how do they work?

Loans are essentially a type of debt. The amount of money that is borrowed or received by an individual from a lender is called the principle. The terms of the loan always requires the borrower to repay back this principle amount with added interest in regular instalments or partial payments.  

Loans have two principle types: secured and unsecured loans. A secured loan requires the borrower to pledge some tangible asset as a backup to the lender in case the borrower is unable to provide repayment.  This is called collateral which will be sold to provide the necessary funds to pay the lender. Mortgage loans are a very common type of secured loans used by many to purchase housing. Mortgage brokers Toronto often aid the negotiation of loan contracts where a title of the house is given to the lender as a guarantee in the event that the borrower defaults on the loan.

Unsecured loans on the other hand, are loans not backed up by collateral and are based only on the borrower’s promise to pay. It is for this reason that unsecured loans rely significantly on the borrower’s credit history and their credit score. Credit card debt, bank overdrafts and lines of credit are just some example of unsecured loans.

Loans provide our economy with the means of which to take on big purchases such as a vehicle, home or payment for tuition fees.  Be financially responsible and borrow only what you can repay. Consult with a mortgage broker Richmond Hill to check if a loan fits your financial situation.