A loan is a sum of money borrowed by a company with the agreement to pay the lender back within a specific period of time.
There are many types of loans. Some are named after their repayment model, such as: balloon loans, floating or variable interest loans, secured loans, fixed-rate loans. Others are named for what they finance, such as: Car loans, student loans, working capital loans.
The elements common to all loans include:
- A promissory note (evidence of the debt owed and schedule of repayment)
- Principal (the amount borrowed)
- An interest rate (the lender’s charge to the borrower for using their money)
Everything else associated with a loan is customized to fit the situation (see the options below).
When all the repayment terms of a loan are met, the promissory note is retired. If loan payments are not made as agreed, the lender can use the legal system to recover the money owed.
More about loans
Loan structures can take many different forms, including:
- Interest-only payments
- Full or partial payments
- Equal monthly blended payments
- Equal monthly principal payments plus interest
- Interest-only payments, with periodic balloons
- Interest-only payments, with one balloon payment
- Accelerating or decelerating payments
- Secured or unsecured