Loans are different from mortgages. Mortgages are types of loans that are secured with real estate or personal property. If so then, what is a loan?
According to an English dictionary, A sum of money or other valuables or consideration that an individual, group or other legal entity borrows from another individual, group or legal entity (the latter often being a financial institution) with the condition that it be returned or repaid at a later date (sometimes with interest) is called a Loan.
A loan must involve two party, the lender and the borrower. The lender is also called a creditor and the borrower is called a debtor.
The money lent and received in this transaction is known as a loan: the creditor has “loaned out” money, while the borrower has “taken out” a loan. The amount of money initially borrowed is called the principal. The principal must be paid first before interest.
Principal on a broader sense means; The money originally invested or loaned, on which basis interest and returns are calculated.
Loans are not just given by individuals only, but also organizations and even governments. Traditionally, the central role of banks and the financial system was to take in deposits and use them to issue loans, thus facilitating efficient use of money in the economy.
There are different types of loans which would be discuss in our next article.