An amount that is in the form of debt given out by a financial organization to another firm or an individual in exchange for the future repayment of the same amount along with interest over a period.
The terms of a loan are mutually agreed by each party involved in the transaction before any exchange of funds take place. This contract typically includes the
- The amount lent out,
- The amount to be repaid,
- The number of payments that shall be made,
- The repayment period,
- And collateral, if any.
Before lending out the money, a lending institution checks for the credibility of the borrower. Credibility is a financial position or a capacity of the borrower to pay back the loans. This analysis is based on the borrower's history of financial transactions. The credibility also decides the interest rate at which the borrower will be paying back to the lender.