Legal Definitions - loan

A loan is a formal agreement where one party, known as the lender, provides money or property to another party, the borrower, with the understanding that the borrower will repay the original amount (the principal) over a specified period. Often, this repayment includes an additional charge called interest, which is a fee for using the lender's money. Loans are structured with specific terms, such as the repayment schedule, the interest rate, and what happens if the borrower cannot repay the loan.

Here are some examples to illustrate the concept of a loan:

• Student Loan: A university student needs funds to cover their tuition fees and living expenses. They apply for and receive a student loan from a bank. In this scenario, the bank is the lender, providing the necessary money, and the student is the borrower. The student agrees to repay the principal amount of the loan, plus interest, over a set number of years after they graduate. The loan agreement specifies the interest rate, the repayment start date, and the monthly payment amount, demonstrating a clear understanding of repayment terms.

• Small Business Loan: An entrepreneur wants to expand their bakery by purchasing new, larger ovens and renovating their storefront. They secure a small business loan from a local credit union. The credit union acts as the lender, providing the capital for the expansion, and the bakery owner is the borrower. The owner commits to repaying the loan over five years with a fixed interest rate, using future business profits. The loan agreement might also stipulate that the new equipment itself serves as collateral, meaning the credit union could claim it if the business defaults on its payments.

• Mortgage (Home Loan): A family decides to buy their first home. Since they don't have enough cash to purchase the house outright, they apply for a mortgage from a bank. The bank becomes the lender, providing a large sum of money to the family, who are the borrowers. The family agrees to make monthly payments over 30 years, which cover both the principal amount borrowed and the accrued interest. Crucially, the house itself serves as collateral for the loan, giving the bank a legal claim on the property if the family fails to make their scheduled payments.