Mortgage Dictionary -> Loan
What Is a Loan?
In the most basic terms a loan is the temporary use of something that does not belong to you. The term loan means different things to different people depending on whether your are the lender, the person lending the item, or the borrower, the person receiving the item.
If your neighbor lends you his lawn mower, he is the one at risk. It is his money that is invested in the machine, and if you do not return it in good condition, it is his loss. Of course, he has no collateral to secure this loan either. That means he did not, for example, take your snow blower to make sure you would return his lawn mower. So to him the loan is a risk, to you it is a benefit. It is a benefit without interest too. That is, you did not have to pay your neighbor for borrowing his lawn mower. He loaned it to you free of charge with no strings attached.
The same principle applies to money. If you do not have enough of your own money to go out and buy something you desperately need or want, then you ask someone to lend you some of their money to use for a time. Usually this someone is a bank. Banks are in the business of lending money which means they are not exactly like your next door neighbor. No matter how friendly your bank is, remember this, lending money for them is how they make a living. So they will want something in return for lending you their money to use for a time.
What banks will want, in fact what they will demand, is interest. Interest is the fee they charge for the use of their money for a certain period of time. Generally, the shorter the time you use their money, the larger interest rate they will charge. The longer you use their money, the lower the interest rate will be. But don't let that fool you. If you use the bank's money for 30 years to buy a house, even the low interest rate will amount to a whole lot of money paid to the bank over that amount of time.
A loan is using someone else's money, tools, or service for a certain period of time. You can be the lender and let someone else use your money, tools, or service, or you can be the borrower. Either way, it's still a loan.