How do loans work?
A loan is an amount borrowed for a specific use such as buying a car or house, or investing in assets or the refurbishment of a building. As opposed to short-term cash advances, loans are a longer-term debt provided by a lender and typically secured, i.e. you provide a guarantee that the loan will be repaid.
Loans can either be secured or unsecured:
- Secured loan: backed by a collateral, security or asset, which the lender can sell if you fail to make the required repayments.
- Unsecured loan: needs no guarantee or asset.
Loans require a thorough application and checks of your finances, income and assets and may take weeks to be processed. If your credit rating is low, you probably won’t qualify for a loan. Home ownership could also be a requirement for a loan as a collateral.
If a business does get a loan, they have to repay the amount via instalments, typically requested on a monthly basis. Every day, interest is added on top of the loan amount, so the longer it takes to repay, they higher is the total you pay back to the lender. If you miss a repayment, it is common to be charged a late-payment fee. If you want to pay back the entire loan earlier than the contracted repayment schedule, you may be liable to pay an early-repayment charge.