Loan

A loan represents an agreement where one party tenders money to another, the borrower, who incurs a debt and is typically required to repay the principal amount along with interest. This interest serves as an incentive for the lender, with key terms like the principal, interest rate, and repayment date often detailed in a promissory note. Providing loans is a fundamental activity for financial institutions such as banks.

Loans primarily fall into two categories: secured and unsecured. Secured loans require the borrower to pledge an asset, like a house for a mortgage or a car, as collateral, leading to lower interest rates due to reduced risk for the lender. Conversely, unsecured loans, such as credit cards, personal loans, or bank overdrafts, do not require collateral. Consequently, they usually carry higher interest rates, reflecting the increased risk faced by the lender in case of default.