A loan is an amount of money that the lender gives to the borrower when the borrower needs money urgently for some specific purpose. The borrower has to pay back the loan to the lender along with an additional amount, which is known as interest. The interest is calculated as a certain percentage of the unpaid loan balance.
The percentage charged is known as rate on interest. The interest is charged annually on the unpaid loan balance. The loan has to be repaid along with its interest within a specified period known as the loan period. In the most common method of loan repayment, the borrower pays equal monthly installments throughout the loan period.
Monthly installments contain both the principal and the interest elements of the loan. In case of interest-only loans, the borrower has to pay only the interest element of the loan throughout the loan period. The principal is repaid at the end of the term or the loan is renewed for another term.
Another important element of a loan is its annual percentage rate (APR). APR is the effective interest rate that the borrower has to pay. It includes the advertised interest rate as well as one-time fees. APR does not represent the total cost of a loan since certain fees are not included in it.
As mentioned earlier, the borrower has to repays the loan as per the terms and conditions. If however the borrower fails to repay the loan amount and is not in a position to repay even in the future, he is declared bankrupt.
When the borrower is declared bankrupt, his assets are distributed among his creditors. After this, he is discharged from his debt obligations. Sometimes, the borrower files for bankruptcy even though he has the money to repay the loan he has availed. This is a crime for which he may be punished by the court of law.
The borrower should consider several important factors such as the rate of interest before availing a loan. He should go for a loan that carries a low rate of interest since a low rate of interest will reduce his debt burden. Loan period is another important factor.
If the borrower wants to repay his loan by way of small monthly installments, then he should go for a loan with an extended loan period.