Money Advice

What is a loan?

This is where one group (the lender) supplies another group (the borrower) with an agreed amount of money with the full agreement that this money will be repaid in full by a set time. A contract is drawn up between the two parties setting out all the terms and conditions of the loan. The lender can also stipulate within this contract that interest payments are to be made on top of the capital repayments. This is usually agreed when the borrower signs the terms of the contract, as well as the dates on which all payments are to be made and by which date the loan must be repaid by in full. Often the lender will include fines for missed or late payments within the loan contract. These can vary between lenders but are often quite high.

Why get a loan?

Loans can be used for many things such as buying a car, house or financing higher education. However, due to all the hidden costs within a loan such as interest payments and late or missed payment charges, loans are often taken out as a last resort.

How and where can I get a loan?

The most common way to get a loan is through a financial institution such as a bank or building society. However, they themselves check whether you as a customer are eligible to get a loan from them. Often they have their own criteria of which you the customer must meet in order for your loan application to be successful. For example, past credit history (your credit rating score, therefore if you have had missed or late payment in the past with other loans or credit cards your credit score might not be high enough). Other factor’s they may take into consideration is your income and your assets, and also the reason you are applying for a loan. For example, if you are borrowing in order to expand an already proven business venture you may be more likely to obtain it than to start a brand new, unproven business venture.

What is the difference between a gift and a loan?

The main difference between a gift and a loan is the kind person who gifts you the money does not expect it to be repaid and therefore it is deemed as a gift. The giver could not ask for it back at a later date or have any grounds to take the issue to court in order for repayment. However, if the same giver stipulates the money given as a loan and the borrower pays back just one pound, the money can then be construed as a legitimate loan. Therefore the lender can demand to be paid back at any time. This is a common situation for small claims courts to deal with, often between family members and it is therefore essential that paperwork must be drawn up when dealing with loans between family and friends.

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