A loan (or a credit) is the provision of debt resources from one person or company to another. Usually a bank or another credit institution lends money to a customer.
The entity which gives the money is called a “creditor” or a “lender” and the other party is called a “debtor” or a “borrower”. Usually the borrower owes the lender interest payable for the period of the loan, plus reimbursement of the full principal amount of the loan. Lenders and borrowers can be both physical and legal entities.
In most cases, the expressions credit and debt are complementary. But they are two distinct terms and their interpretations differ, although credit and debt are similar in nature. The credit is the earlier stage of a debt transaction. The borrower should have a credit before obtaining a debt. For example:
The automobile loan or mortgage loan is offered in the form of a credit, nevertheless, it is converted to a debt as soon as it is obtained by an individual. Otherwise, under no circumstances an automobile loan or mortgage loan is regarded as a credit to the individual.
The loan is generally provided at a cost – the interest on the debt. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.
Sometimes credit is not granted, usually when the borrower is not financially stable. Companies often offer credit to their customers as part of the conditions of the purchase agreement. Organizations that offer credit to their customers often use credit management. Many forms of credit can easily act as a medium of exchange. Loans can also be traded on the financial market. A credit swap represents the price at which two parties exchange this credit risk.