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A loan is an arrangement between two parties (Bank & customer) where money is lent by one person (Banker) to another (customer/borrower); this is a legal contract between the lender (creditor) and the borrower (debtor). Lending money is very usual but it (lending) can also include goods, services and even people but this article is dealing with those of a financial nature. Unlike most other types of loan, those involving cash will gradually be paid back over a period of time previously arranged; at the same time it is possible to make 3 or 6 monthly repayments, the usual time period is one month.

When debts are repaid a charge is added to the sum payable called ‘interest‘ this is how the lender can gain from the service he has provided. For instance, some debts repay the interest first, once this is cleared, the borrowed sum is gradually repaid. The most common type of loan is that where the interest charges are added to the capital sum then the total is divided into equal amounts with a small amount of interest being paid each month.

Even though this is the main function of all financial institutions, they do have other functions as well. Credit and bank loans are a quick and easy way for anyone to increase their cash flow with only minimal effort; many other cash raising methods are also exist but this is the simplest.

Arranging a mortgage is little more complicate, the use for which it is required is not flexible and the money can never be used for anything other than buying/building a house or land. However, in this type of loans a form of security is needed before the money is lent. Defaulting on a loan like this might mean that the bank or other lender could repossess the house and then re-sell it; often banks will retain the property until its value increases.

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