We are all born with debts. The mantra of life is loans. There is the debt to the parents who rear us, to society for the various benefits we get and to teachers who fill our coffers with knowledge. With this capital we are to forge ahead and leave the world a better place than we found it. This way of taking loans and repaying loans has been going on from ancient times. Thus we find there is the constant play of give and take. Very specifically in financial parlance loans are monetary debts. The basic principle is the same – both the taker and the giver of loans must benefit to give society and economy the rolling push. The particulars of loans include how much is to be repaid during what period of time. The most famous story about taking and giving of loans is about the moneylender Shylock who had demanded a pound of flesh as repayment for a debt incurred by the merchant Antonio.
The game of loans is between the lender and the borrower. Anything material can be lent but generally we focus on monetary loans as a financial instrument. The borrower takes money from the lender. This is paid either in regular installments or at one time – depending upon the terms of the agreement. The borrower is hemmed in by the restrictions of the loan agreement known as covenants for loans. The main task of financial institutions is to advance loans. Bank loans advancing credit increases money supply – something vital for the economy to run on its rails. Loans are basically of two types – secured and unsecured.
In a secured loan the borrower has to pledge a valuable asset as security or collateral. The loan amount depends on this security. Mortgage loans are very common debt instruments and are mainly used for those who buy houses. The lender – usually the bank or the financial body – gets a lien on the property. It means that if the borrower fails to make repayment after a certain period the lender has the right to sell the property and take back dues.
It holds good in the case of purchasing a car. The car is mortgaged to the giver of the car loans. The repayment period of car loans are shorter – generally corresponding to the anticipated life span of the vehicle. There are two kinds of car loans – direct and indirect. In the former case the bank directly gives the loans to the customer but in the latter the loans are given to the car dealers.
Unsecured loans are not covered by any security or assets. There are various names for these – credit card debts, personal loans, overdrafts from banks, online credit loans, corporate bonds etc. The interest depends on the discretion of the lender who is usually guided by the credit ratings of the borrower and market competition.
The bottom line of loans is that loans have to be repaid for reasons of self respect and health of society.
