Jasmine Directory

At the most basic level, a loan is one entity giving an asset to another for a specific period of time, at which point the asset must be returned. The entities involved can be people, businesses, banks or governments. The asset can be just about anything; however, by far the most common asset to be loaned is money. The period of time varies from contract to contract.

Some loans, such as one person lending a lawnmower to a neighbor, are without cost and have a short duration. These are not the norm. The most standard type of loan is a financial institution -- usually a bank or credit union -- lending a certain sum of money to a person or business that needs more money on hand than they currently have access to. These types of loans are not without cost.

The cost associated with a loan is called interest. When a sum of money is loaned to a person or business, each month that person or business must pay back a portion of the loan. The exact amount owed is calculated from the remaining balance of the loan plus an interest rate. This way the bank or financial institution makes money by lending money. This allows them to lend more money to more people, and make more profit to continue the cycle.

Loans are generally subject to a great deal of oversight. Each loan is attached to a contract with significant penalties for non-repayment. Usually the penalties result in more money being owed in the future. Borrowers can manage the amount of money owed by paying more than the minimum repayment amount each month.

The less they pay each month, the more principle balance remains, and the more money is added due to interest rates. Typically, borrowers receive loans to pay for large purchases, such as college tuition, a new vehicle, a new home or funding a business.