What is loan? Definition and Concepts

A loan is a transaction whereby a financial institution makes available a certain amount of money by a contract.

We acquire a loan obligation to return the money within a period of time and pay a commission and agreed interests. We can repay the money in one or more installments, but, usually, the amount is returned in monthly installments including commissions and interest.

Speaking of loans, the amount of money that we borrow is called the ‘principal’, while the ‘interest’ is the price we pay for being able to have that money. The time period to repay the loan is known as the ‘term’.

The ‘lender’ is the person or financial institution lending the money or property on loan. The ‘borrower’ is the person who receives the money or property on loan.

According to Article 1.740 of the Civil Code, “By the loan agreement, one party delivers to the other, or something not fungible to use it for a while and return it, in which case it is called bailment, or fungible money or anything else, with the condition to return another of the same kind and quality, in which case simply retains the name of the loan.

The loan is essentially free. The simple loan can be free or covenant to pay interest. “

Also read: What are the types of loans available at banks?

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