Creditors and Debtors
Any person borrowing money (a loan) is referred to as the debtor’ and the person lending the money is called the creditor’; this is a legal contract between the lender or creditor and the borrower or debtor. Lending money is the most usual reason but it can also include goods, services and even people but this article is dealing with those of a financial nature. Like all debts, a monetary loan entails the gradual payback of the initial sum borrowed over time, between the lender and the borrower; the usual repayment method is based around monthly installments but this period can be longer.
The debt is repaid but an interest charge is added for the service being provided and the method by which the lender is compensated. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest.
Most of the time, this is the only contact the majority of people have with financial companies and it is just one of many roles they have; although this is the most important. Arranging a loan this way is a normal method for individuals as well as businesses to have a sum of money in their account to do with as they please; many other cash raising methods exist but this is the simplest.
A mortgage on the other hand is designed for one purpose, that of purchasing property or land and is one of the most common types of long term debt individuals experience. In this instance, the lender is given security on the money advanced in the form of the title deeds of the house until the debt is repaid in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it; to recover sums owing to them, they may place it an auction.
There is nothing to stop any lender asking for the loan to be secured and this can happen when a car is bought using this method; where the car becomes the security for the money lent to the borrower. The duration of the loan period is often considerably shorter, usually corresponding to the useful life of the car; in this case money lent for a car will have a relatively short repayment period.
Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; if you have an overdraft or credit cards for example, this is exactly what these arrangements are. The interest rates applicable to these different forms may vary depending on the lender, the borrower and the type of credit supplied.
In some countries, predatory lenders are called loan sharks and it is where they supply money at high interest rates with the sole intention of gaining control over a person. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
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