What is a loan?

We have thought about the basics of financing and how it works, as well as what affects your finances. We can take a closer look at loans and borrowing together.

You might be thinking now: “Everyone knows what a loan is?”. Simply put, ``what is a loan?'', and in its simplest sense, you're probably right. A loan works in much the same way as borrowing from a friend, but over the years the financial industry has come up with a common language and structure for loans. Some of them are good to know to understand what a loan is when banks talk about it in more official contexts.

Loans can be made with individuals, organizations, between nations, associations, communities, and many others. However, most loans work pretty much the same way, at least if they are regulated sensibly and legally correctly. A loan is a money loan granted by a bank to an individual or, for example, a company. The loan agreement is concluded between the Bank and the borrower, and the loan agreement defines the amount of money borrowed, i.e., the loan capital, the interest rate, the repayment date, and the payment plan.

The loan agreement between the person and the bank could be explained as follows: Josefin needs to borrow money for her trip. The bank is ready to lend the amount but wants a certain amount of the loan amount when handing over the loan amount. This is often called a loan service fee or commission. The bank then says that for each year that Josefin has not paid the entire loan, they want compensation, the amount of which depends on how much of the loan is unpaid. This payment is called interest.

Interest and expenses

Two words that appear frequently are the total cost of the loan and the annual percentage rate. The total cost of the loan is the total amount that Josef must pay in addition to the loan amount because the bank has lent her money. The actual annual interest rate (APR) is all the loan-related costs that Josefin would have to pay to the bank in a year, calculated as a percentage of the total amount of the loan.

The actual annual interest rate includes the loan's nominal interest rate, the loan administration fee, and a possible opening fee. The actual annual interest rate therefore considers all the costs related to the loan.

In Finland, there has long been a requirement that banks, or financial institutions must declare the effective annual interest rate of the loan terms. For a shorter period, a year, a longer period or, for example, a Fixura personal loan, this is an essential measure that allows you to easily compare different loan terms.

When taking out a loan, you should consider the loan's effective annual interest rate, as this gives a good idea of ​​the total cost of the loan.

Summary

In this article, we have reviewed the basics of a loan. We have also reviewed the basics of various loan related terms. For example, various expenses that may have arisen in connection with the loan. We have also familiarized ourselves with the basics of the loan agreement. So, this has been something to think about and a reminder of what to take into account in connection with taking out a possible loan.