Consumers obtain loans from financial institutions such as banks or credits unions in order to finance large purchases that cost more money than they currently have on hand. A consumer borrows the necessary money from the financial institution and then pays back the loaned amount over time.
What sort of purchases might require loans? The most common loans are those that are granted to consumers who are buying a home, buying an automobile or financing a college education. Credit cards also represent loans in the sense that merchants accept payment from a credit card issuer when a purchase is made and the card is presented, and then the consumer repays the credit card company for the purchase amount at a later date.
It may seem as if these lending institutions are quite generous. After all, they distribute money to people who need it. Certain rules and conditions, however, accompany any loan.
First, it may be difficult to obtain a loan. Financial institutions will assess a loan applicant’s likelihood of repaying the loan based on that applicant’s financial stability and his or her bill payment history. If that likelihood is questionable, the applicant’s request for a loan may be denied.
Second, any loan will be tied to an interest rate. An interest rate represents a percentage of the borrowed amount, and it is charged to the borrower. This means that borrowers actually pay back more than they borrow. An interest rate may be fixed, meaning the percentage will stay the same throughout the life of the loan, or it may be variable, meaning the percentage could go up or down.
Third, a lending institution will obligate a borrower to certain repayment rules. Typically a consumer must pay a portion of the loan and interest every month until the borrowed amount has been entirely repaid. A good lending specialist will inform a borrower of the repayment rules for his or her loan, and will also describe the consequences a borrower may encounter if the loan is not repaid according to the rules.