What Is a Loan?

A loan is money that one party borrows from another with the agreement that it will be paid back over time.
The person or organization that borrows the money is called the borrower,
and the one that provides the money is called the lender.
Loans are a common financial tool used to manage large expenses or short-term needs.
You can also understand the broader purpose of loans in everyday financial planning.

How Does a Loan Work?

When a loan is taken, the lender gives a fixed amount of money to the borrower.
In return, the borrower agrees to repay that amount over a specific period of time.
This repayment usually includes an extra cost called interest, which is the price paid for borrowing money.
A detailed breakdown is explained in how loans work.

Loan agreements clearly define how much money is borrowed, how long repayment will take,
and how often payments must be made.
These terms are formally written in a loan agreement.
Some loans have fixed terms that stay the same,
while others may change based on conditions outlined in the agreement.

Key Terms You Should Know Before Taking a Loan

Term	Simple Meaning
Principal	The original amount of money borrowed
Interest	The cost of borrowing money (learn more)
APR	The yearly cost of a loan including interest
Tenure	The time period to repay the loan (explained here)
EMI	A fixed monthly payment toward the loan (what is EMI)
Collateral	An asset pledged as security for repayment

Types of Loans (Overview Only)

Loans are grouped into categories based on how they are structured.
These categories help explain how different loans work without going into details.
A full beginner-friendly breakdown is covered in
types of loans explained.

Secured Loans

Secured loans are backed by an asset such as a house, vehicle, or valuable item.
The asset provides security to the lender.

Unsecured Loans

Unsecured loans do not require collateral.
They rely on the borrower’s financial reliability and agreement to repay.

Government-Backed Loans

These loans are supported by government programs and are designed to improve access to borrowing.

Common Uses of Loans

People and organizations use loans for many everyday purposes.
Loans help spread large costs over time instead of paying all at once.

• Buying a home or property
• Paying for education
• Starting or expanding a business
• Handling emergencies
• Covering personal expenses

Loan Interest Rates Explained (Basic)

An interest rate shows how much extra money a borrower pays in addition to the principal.
Some loans have fixed interest rates, which remain the same throughout the loan period.
Others have variable rates, which may change based on conditions described in the agreement.

Interest rates can differ because of loan type, duration, and risk factors.
They help lenders cover costs and manage financial risk.

Loan Repayment Basics

Loan repayment usually happens through regular installments, often called EMIs.
Each payment reduces part of the principal and covers interest.
Understanding EMIs and
loan tenure
is important for managing repayments.

If repayments are missed, additional charges or penalties may apply.
Understanding repayment responsibilities is an important part of borrowing.

Advantages and Disadvantages of Loans

Advantages

• Provides access to funds when needed
• Allows large expenses to be paid over time
• Helps manage cash flow
• Offers several benefits of loans when used responsibly

Disadvantages

• Interest increases the total cost
• Creates repayment obligations
• Missed payments can cause financial stress

Loan vs Credit (Simple Comparison)

Loan	Credit
Fixed amount	Flexible limit
Set repayment period	Ongoing access
Structured payments	Variable repayment

Things to Understand Before Applying for a Loan

Before borrowing, it helps to understand eligibility requirements,
interest costs, repayment duration, and legal terms defined in the loan agreement.
Loans are agreements that create long-term financial responsibility.

Frequently Asked Questions About Loans

What is a loan in simple words?

A loan is money borrowed with the promise to repay it later, usually with interest.

What are the main types of loans?

Loans are mainly secured, unsecured, or government-backed.

Is interest mandatory on loans?

Most loans include interest as the cost of borrowing.

What happens if a loan is not repaid?

Missed repayments can lead to penalties, additional costs, or legal action depending on the agreement.