A loan, be it a payday loan, car loan, or student loan is a type of debt, involving the redistribution of assets between a borrower and a lender. Borrowers can be individuals, businesses, corporations, government institutions, and other entities. In Canada, lenders are the big banks, chartered banks, credit unions, credit card companies, etc.

The borrower receives certain amount of money, referred to as the principal. The money should be repaid over a specified period of time, typically in partial payments or installments. Loans are typically granted at a cost, which is the interest paid on the loan. This is the incentive of the lender to provide financing. A formal contract determines the terms and conditions, including the interest rate, the term of the loan, the fees and penalties, and more.

The loan can be a secured loan and unsecured loan. With secured loans, the borrower is required to provide collateral, typically real estate property or car, to guarantee the loan. A mortgage loan is granted to buy housing. The money loaned serves to buy the property, but the lender is given a lien on the title. If the mortgage owner defaults and is unable to pay back the money, the financial institution repossesses the property and sells it. A home equity loan is not the same as a mortgage as it is a second mortgage. Home equity loans can be divided into two types – lines of credit and fixed-rate loans. Home equity credit lines are in the form of variable-rate loans, with borrowers having certain spending limit. With fixed rate loans, the borrower receives a lump sum, which has to be paid back over a specified period of time.

Unsecured loans are not secured with collateral and are offered by almost any bank and other financial institutions. Unsecured loans come in a great variety: personal line of credit, credit card debt, corporate bonds, bank overdrafts, personal loans, etc. With unsecured loans, creditors rely on the promise of the borrower to pay back the borrowed amount. For this reason, they are also called signature loans. Lenders take bigger risk because there is no collateral to guarantee the loan. The interest rate is typically higher with unsecured loans, and penalties may apply if the borrower wants to pay off the borrowed amount before the term of the loan. In general, unsecured loans are less flexible and more expensive.

Business loans are another type of debt instrument. Banks and other financial institutions offer various types of business financing such as business lines of credit, business loans, overdraft facilities, etc. Business loans can be taken out for different purposes, including business expansion, moving an existing business to a new location, and opening a new company. The amount of the money required varies depending on the purpose. Lenders grant business loans based on the applicant’s credit history, the venture’s risk, the presence of collateral, and even the political climate in the country. These factors determine the loaned amount, the interest rate, and the term of the loan.