What is a Loan?

Perhaps you are wondering how to finance a new car or home. Or maybe you want to go back to school, but just don’t have the money. Or an emergency situation pops up, and you need a little bit of extra cash in a pinch. Friends and family might suggest that you take out loans. But what exactly are loans? Where do you get loans, and how do you know if you meet the conditions required get approved for a loan? These are common questions that can be answered with some basic information.



A loan is any amount of money that is borrowed temporarily, and returned with the fulfillment of additional agreed upon terms. For example, lenders expect that a loan is not only paid back in full, but that it also will be paid back with an additional fee or with interest. Lenders are typically banks, private companies, or other financial institutions offering short-term loans.

Some lenders offer flat fees based on the amount of money borrowed and the number of days in which the money will be paid back. Other lenders charge an interest rate, which is a percentage of the original loan amount that will be paid in addition to the original amount. Over time, interest accrues, therefore a lower interest rate is more favorable for a borrower.

When requesting a loan, most lenders have some standard conditions required for approval. One common condition is a reputable credit score or credit report. Lenders may be hesitant to offer loans to people with records of delinquent payments, because this is a bigger risk than lending to someone whose record shows consistent payments. Credit histories can sometimes cause the interest rate to increase for loans. Other times, very poor credit situations can cause denial of loans.

Other lenders have more minimal conditions needed for loan approval. For example, instead of basing loan decisions primarily on credit history, some lenders require proof of employment as the primary requirement for a loan approval. Payday advances and cash advances are financial institutions that typically use this criteria in their lending process.