What exactly is a loan?

Those who want to borrow money from third parties, for whatever reason, usually come in contact with the term "loan". Colloquially, a loan is often also referred to as a credit, although a credit differs from a loan in legal terms. In the shortened version, "loan" is also a term used. There are different types of loans, which refer either to the purpose of the loan or to the terms of the loan. As a rule, in this way borrowers can choose the most optimal form of credit for them in consultation with the lender.

a man signs a loan agreement

What is a loan?

A loan is a loan of money or property from a so-called creditor (lender) to a debtor (borrower). A contract under the law of obligations is concluded between the two parties, usually in writing, especially in monetary matters.

The loan is granted for a limited period of time, during which the lender provides the debtor with a certain amount of money or an item for use. A loan can be made against payment or free of charge. This means that, depending on the contractual agreement, in addition to the repayment or return of an item, an interest rate is demanded by the lender.
A classic example is a loan from a credit institution, which under certain conditions, lends the borrower, who must pay interest to the lender to repay the loan.

With a loan, the time period of the loan is set and determined as the term of the loan. The interest rate is calculated on the basis of the percentage interest rate, the term of the loan and the amount owed. If loan repayments are made, the remaining debt amount is reduced and the interest amount is reduced accordingly. Depending on the loan agreement, there is a distinction between a fixed interest rate and a variable interest rate.
Interest payments are normally made after the end of a calendar year or, in the case of short terms of less than 12 months, upon repayment of the total loan, unless otherwise agreed between the parties.

In addition, a so-called loan fee can be demanded from the lender. The amount of these usually depends on the amount of the loan and is based on different fee schedules of individual credit and loan institutions.

What is an amortizing loan?

The redemption loan is based on an origin in which the term "redemption" can be traced back to the anglo-saxon word "dilegian" in the early century, which in turn was derived from the latin "delere" and means as much as "to destroy, redeem".

An amortizing loan is a contract under the law of obligations in which the amount usually charged per month is determined by the amount of the amortization and the interest payment. The principle here is that the loan amount decreases with each partial repayment and the interest rate decreases accordingly with each partial repayment. In a repayment loan, the repayment portion is fixed in advance per due date, but the continuously reduced remaining debt reduces the interest burden. Experts also refer to this as linear repayment, where the repayment rate decreases with each payment.

An amortizing loan is especially useful as an alternative to an annuity loan, at

– commercial financing
– real estate loans

What is a home loan?

The origin of a home loan should be in the 18. Century are located. The origin story refers to an incident in the british city of birmingham, where in 1775, in the context of a great housing shortage, the idea of a kind of savings scheme was developed. English workers are said to have founded the first building society, according to stories. Monetary contributions have been paid into and collected. As a result, cash deposits were made, which allowed the savers to make larger sums available, if needed, for their own housing finances.

The principle has been carried over to modern times and is used as a so-called building society loan. In this case, a building savings contract is concluded with a definite building savings loan amount, in which a fixed building savings sum is paid in over a longer period of time.
As a rule, depending on the provider of building savings contracts, the savings payments account for between 40 and 50 percent of the total building savings amount including interest, which was determined in advance when the contract was signed. The remaining percentage can be taken out as a building society loan. For this purpose, a certain valuation value and the end of the term as well as the agreed savings amount must have been reached in order to be able to take out a building society loan for the saved building society sum. The savings payments are thus eliminated and the repayment of the building society loan begins quickly.

The respective bauspar insurance company uses the savings amounts paid in to make loans to other bauspar customers. Loan repayment will be made into the same pool as all other savings accumulations, so there will be money available from this for other policyholders' home loans.
If, in order to apply for a home loan, many other policyholders also want to use a home loan, the home loan company may not have sufficient liquidity from the home loan pool. Here, interim financing must be provided, which causes the otherwise low interest rate on the loan to rise. Accordingly, building savers often rely on several smaller building savings contracts, which can be more easily disbursed from a building savings pool alone, thus giving the building saver greater chances of obtaining low interest rates on a building savings loan.

What is an annuity loan?

Similarly as with a repayment loan, it goes off with a annuitatsdarlehen. The difference is based primarily on the term "annuity", which is derived from the latin word "annus" and defines a "year". It has been used since the birth of christ and is known mainly in ecclesiastical writings and in ancient rome as "anno domini".

In finance and in connection with a loan, "annuity" describes the yearly pattern during a loan. In contrast to the amortizing loan, all the installments up to the loan settlement always remain the same during the term years.
At the beginning of the installment payments, the interest calculation is the highest due to the still high loan amount. Due to the constant reduction of the remaining debt due to the repayments, the interest burden decreases with each repayment installment. Unlike an amortizing loan, the amortization rate now increases in the same proportion as the interest portion decreases, so the borrower can always expect the same rate on the specified maturity date. Especially in real estate financing, the annuity loan is often preferred over an amortizing loan.

What is a partial loan?

The term "partiary" is derived from the latin word "partire" and translates as "to share," which in finance refers to a participation.

A patriarchal loan is when the borrower needs this, for example, for a start-up business, for a business expansion or to avoid bankruptcy. Unlike a traditional loan, lenders are not "compensated" through interest payments, but receive a profit- of revenue share in the business for which a loan was made. It is a form of investment, to be compared with a silent partnership and is also titled as an equity loan. Depending on the agreement, interest liabilities can be added in addition to a profit or revenue share.

Unlike a purchase of shares in a company, in a participatory loan, the lender is not a shareholder and has limited say in the company, depending on the value of the investment. In addition, with partiachic loans, a term is agreed upon, at the end of which the lender must refund the loan amount plus interest, if applicable, to the lender.

If the financially supported company does not generate any or only low profits or sales, the investor or lender can also draw only little or no income from the loan. However, this type of equity loan also eliminates loss liability. That is, the lender is not liable for corporate debts.

The participatory loan has a history dating back to the middle ages of ancient venice. Here it was already a common financing program, which was used by merchants to boost their business or to start new businesses. Christopher columbus is also said to have found financiers in this way to finance his voyages.

What is an installment loan?

The history of the installment loan began in the early 19th century. The first financing plan by installment payments was made possible in the 19th century by the furniture store "cowperthwait & son", which was located in new york at that time.
In 1850, the american singer sewing machine company followed suit and offered installment payments to pay bills.
As a department store with installment loans, the entrepreneur alex friedlander was the first german to introduce purchases based on installment payments.
The first installment loan for vehicle financing was made in 1917 through the commercial investment trust and was first introduced for the purchase of racing cars.

To date, the installment loan has become widespread and allows consumers to make purchases with little or no financial resources of their own, and depending on the company's offer, to repay the purchase price in mostly monthly installments.

With several repayment installments, these remain constant throughout the term. As a rule, interest payments are only due at the end of the term or a calendar year. Due to the repayments, the remaining loan amount decreases, so that the interest amount decreases with each year. This distinguishes the installment loan from, for example, the annuity loan, where the repayment amount is automatically increased by the amount of the interest reduction, and in this way, at the end of the repayments, the loan is completely settled, including interest payments.

An installment loan is a colloquial term for a loan in which repayment installments pay off the loan amount. Repayment installments can be made monthly, once a quarter, every six months, or in one whole at the end of the loan term. Installment loans are usually applied between consumers and businesses. Predominantly installment loans are taken up, if the repayment in a relatively short running time can take place, because a current financial bottleneck is to be bridged and/or a purchase price not completely to be raised to be able or would like. Widely used are installment loans at, for example

– vehicle purchases
– in the mail order business
– travel bookings
– more costly handyman services
– in cosmetic surgery

What is a bullet loan?

With a bullet loan, no repayments are made during the term, as is the case with amortizing or annuity loans, for example. Here, loan repayment occurs only at the end of the loan term. Only the interest is due, whose payments are usually made at the end of each year, with the last interest payment being made with the loan repayment. The expert speaks also of a fixed loan. A good credit rating for a bullet loan, is the norm.

A bullet loan is usually used when a certain period of time is to be bridged, at the end of which the borrower expects a cash payment, such as from a life insurance policy or building savings contract. This is also a case of interim financing.

If money is needed in advance, an early termination of life insurance or similar, is always accompanied by noticeable losses. For this reason, many consumers or entrepreneurs tend to take out a bullet loan to avoid terminations of current financial investments. However, it should be noted that especially with safe investments, a negative interest rate can occur if the interest on a bullet loan exceeds the interest rate benefits of a safe investment. A loss must therefore always be accepted in the end, which is usually, however, compared to plant terminations, lower.

Another reason for a bullet loan is the tax advantages it offers, especially for real estate rentals. The interest on the debt can be deducted for tax purposes, while if life insurance or similar is paid out, the interest income would be taxable in the first twelve years of the term. However, the tax advantage does not apply to the financing of private property.

Conclusion

The differences between the various types of loans are often minimal, although depending on the intended use and financial situation, these can be serious for the borrower. Here it is now time to start choosing the appropriate loan form so that they meet the personal needs as well as are financially most advantageous to the borrower.