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What is a loan?


A loan is money lent to you so that you can buy something, for example a car, a house or a business, when you can't afford to pay for it outright. You then pay the money you have borrowed back in regular instalments over a set time frame agreed with the lender.

Where have you heard about loans?

From lending a friend the money to pay for a drink when they haven't been to the bank, to buying your first home, loans are part of everyday life. You also come across them in a business or finance context too. Banks giving mortgages to people and businesses who couldn't afford to repay, or on property that was overvalued, was said to be one of the causes of the 2008 financial crash.

What you need to know about loans.

Loans is a general term that covers all kinds of lending including more specific types of loans such as mortgages, credit cards, loans and other credit products. If you get your mobile phone on a monthly contract you are essentially taking out a loan to pay for the new phone as well as the cost of services you use.

Most lenders will charge you for the continuing use of their money this charge is known as interest. They may also charge you set up fees to arrange the loan and penalties if you pay off your loan early. You need to take these kinds of charges into account when you are comparing loans. You can't just compare the basic interest rate, instead you get a better picture if you compare the APR (the annual percentage rate) which includes all charges involved.

Before deciding whether or not to offer you a loan a lender will check your ability to pay the loan back by looking at your income and your expenditure. They will also check your credit references to see if you have paid back other loans in the past and if you pay other bills in full and on time to see how reliable and financially responsible you are.

Find out more about loans.

For more information about interest rates on loans see APR. Read about how loans are pooled into loan-backed securities.

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