In finance, the term loan refers to debt issued by a lender at an interest rate and accompanied a promissory note that state out the provisions of the debt. The bank receives a principle amount, which is paid over a specified period and at a set interest rate. Based on the target market, loans can be for either business purposes or personal use with each category bearing different terms. Personal loans are used to fund projects deemed non-profitable but essential such as housing, cars, furnishings, and education among others. On the other hand, business loans are meant for profit generating projects.
Loan contracts bear different kinds of terms ranging from simple promissory notes to complex loans such as Payday, auto, student and mortgage loans. Regardless of the type of the contract and the terms associated, all credit facilities operate under the state and federal laws that prevent consumers from predatory conduct such as exorbitant interest rates. In the event of default, the contract stipulates the procedure of collecting the outstanding amount and the costs involved as well. It is, therefore, important for borrowers to familiarize with the credit markets before applying for a loan.