A loan is an advance of money or some other thing of value from party A to party B with a promise of repayment from B to A. Sounds simple enough doesn't it? And 3,000 years ago it was. Farmer Enoch would give 10 bushels of wheat to grape grower Agrum for 3 bottles of wine. This was a barter. But if Agrum could not deliver the wine right then, Enoch would ask for 4 bottles of wine in 2 months when the grape crop came in. This was the beginning of lending with interest. In this case, Agrum got to use the wheat immediately and didn't pay for it until two months later. That extra two months of time cost Agrum 1 extra bottle of wine.

So that's the first lesson. Delaying payment for anything will usually create interest. Interest is the extra price you pay for the use of money over a period of time. The longer it takes to pay back the original loan, the more interest you will pay. It works this way regardless of who is doing the borrowing and lending. When you open a savings account, you are lending your money to the bank and they pay you interest to use it. The bank in turn loans it out and collects more interest at a higher rate from whomever borrows it. The difference between what the bank pays you for your savings and what they get in interest from borrowers is called the bank's spread.

A loan is a legal and binding contract between the lender and the borrower. There are two basic types of loans. Secured and unsecured. Secured loans are backed by some type of collateral. Anything can be collateral. Most widely used types of collateral are autos, homes, boats, money, bonds, stock, insurance policies with cash values, cattle, crops, etc. In fact, anything of value can be used as collateral as long as you own it and can prove you own it. Unsecured loans do not have collateral to back up the loan hence the term, UN-secured.

Secured loans use three basic instruments to create the loan. First is some type of ownership document proving the borrower owns the collateral or property. This can be a car title, a real estate deed, a savings account statement, a bill of sale or anything that proves ownership. Every lender is going to want proof of ownership or intent to purchase. After all nobody wants to loan ME money based upon the value of YOUR car!

Second we need a note, some type of promise to pay or a credit agreement. This is the actual loan contract which states the terms and conditions of the loan. It will show the interest rate, the date of the loan, when interest starts running (accruing), how long the interest goes, the amount of each payment and dates when payments are due. By federal law, all loans must boldly show the interest rate as an Annual Percentage Rate (APR). This is the interest rate you will pay on an annual basis, factoring in any long or short payment start dates, extra fees that are really interest and how often payments are made. It is a very good way to compare the cost of the loan. It puts all loans on a level basis.

Have you ever gotten those credit card statements in the mail with a folded brochure that says something like "change in terms"? Usually the print is small and it is packed with legal wording. Well, these are changes to the terms of the credit agreement that you have with the issuing bank. This credit agreement is a promise to pay. It is the contract under which you are allowed to use the credit card. Car loans have notes or credit agreements. Notes usually cannot be changed at will and are called closed-end. In order to change the loan terms of a closed-end loan you have to pay off the note or agreement and get an entirely new note or agreement. The opposite is an open-end loan. These types of loan agreements are used for revolving credit like a credit card or a merchant account. They can be changed often without the need to sign (execute) a new loan agreement. Usually all variable rate loans are also made under an open-end credit agreement. So some type of legal contract requiring repayment of the loan is the second item needed for a loan to begin to be valid.

The third item for a loan to be made is some type of security document. This shows that the lender has a security interest in the property or collateral that you have offered. The document is usually a financing statement for autos and other moveable and tangible collateral (called chattel property), a mortgage for real estate and a purchase money mortgage for revolving credit. These all show the world that the lender has an interest in the collateral and can seize the collateral to repay the debt. This seizure is called repossession for chattel property or foreclosure for real property. This security document is many times filed at a public place such as the county courthouse and is made public record. In the case of real estate, it is always filed publicly.

Although not strictly required for a loan, most lenders will want you to show them that you have insured the collateral in such an amount that a large loss will leave enough insurance proceeds to pay off the loan. This is of course especially true with big ticket items such as homes or autos.

  Where Do Loans Come From?

Financial institutions such as banks, credit unions, mortgage companies, insurance companies and savings banks all make loans using depositors or stockholders money. Governments make loans with tax money. Credit companies also make loans from stockholders money or people who have loaned them money through bonds. Credit card loans are unsecured and come from banks and credit unions. Merchants also make loans for the purchase of their goods and services. Merchants consider these advances to be accounts receivable and don't really show them as loans on their books, but they are loans. Family members make loans to other family members. A family member to family member loan can have a very low interest rate and still not be considered a gift. The IRS periodically sets what minimum rate you can charge a family member and it be considered a loan and not a taxable gift. All of the loan sources listed are subject to usury laws set by each state. These are laws stating the maximum APR which may be charged in that state. As you can see the sources for loans are almost endless.

  How Do I Get a Loan?

Anyone of legal age can obtain a loan. So where go you begin? SCAN ! Remember this word. It stands for SHOP, COMPARE, APPLY and NEGOTIATE. So get ready to SCAN.

Shop among several lenders. Regardless of the type of loan you are interested in, shop around for at least 3 to 5 sources. Get quotes from as many sources as you feel comfortable with. There are many on-line sources for loan shopping, here are just a couple:  E-Loan and Lending Tree. They are quick and their terms are very good. And they give you up to 4 loan quotes with each application. If you are looking for any type of mortgage loan, be sure to check out our Mortgage Page. 

Compare terms of all the quotes you get. First look at APR, then at the actual length of the loan and amount of payment. This can be tricky if comparing variable rate loans or mortgage loans. Take your time and don't rush into anything. There are a lot of loan fees that lenders can charge so be sure you compare these fees. You can look at the total of all payments on your quotes and get an idea of which is the best. But the real key is to find everything that the lender is going to charge you and take it into consideration.

Apply for the loan. Sometimes this step comes first becuase lenders are hesitant to quote you terms without knowing something about you. Always be truthful on these applications and give only the information requested. This application along with your credit rating is going to determine the rate, how much and how long a loan you can get. By the way, lenders use the 4 C's of credit: Capacity, Collateral, Credit rating and Character. They look at all of these areas when making loan decisions. That is why it is very important to know what is on your credit report. You can order your credit report from all 3 major credit reporting agencies by going to Equifax.com

Negotiate the terms of the loan. Lending is very competitive. Lenders want your business, even if maybe your history isn't the best in the world. So whatever terms are the best in your shopping and comparing process, make a counter offer of terms. Always ask to get the loan at a lower interest rate without paying any additional fees. And if a lender wants to charge you an application fee, don't go for it. If you don't get the loan, you are out the fee with nothing to show for it.

Finally, always pay all of your loan payments on time and in full. If you ever have trouble in doing this, contact the lender immediately. They will be very lenient with you and this will ensure that a short-term money problem will not ruin your credit. However, if you are perpetually late with payments, it could effect your loan rate and your credit report as well as, believe it or not, your insurance rates.