What is a Loan?

A loan is something that one borrows with the intent and the assumption that it will be returned, sometimes with interest. Anything can be borrowed or loaned, but our focus is on money, finances, assets. In the process of loaning, there is redistribution of financial assets over time, between the lender and the borrower.

In the loaning process, a person (the borrower) obtains money from another person or entity (the lender) with the express and written understanding that the money is to be repaid over a preset period of time. The payments are usually, but not always, made in regular installments. The loan is a service that is offered at cost, and the lender makes a profit for allowing the borrower to repay the money over time. This cost of lending is known as interest. The rate of interest is determined and agreed on prior to borrowing. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.

Financial institutions, as part of their business, act as a provider of loans. Issuing of debt contracts such as bonds is a typical source of funding for other institutions.

A loan is considered, under legal terms, to be a contractual promise of a borrower to repay a sum of money in exchange for the promise by a lender to give another sum of money.

The borrower is sometimes referred to as a debtor, and the lender as a creditor.