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Borrowing money is something that people have been doing for centuries. Loans represent a large part of the economy and are a staple that people are not soon going to give up. The whole concept of a loan is that it allows you to borrow money to buy something you can not afford to buy. There are many different types of loans, each with a specific purpose to meet a specific need.

The whole point of a loan is to allow people to make large purchases. Over time, though, lenders have developed loans for other reasons. Today there are loans for almost every purpose imaginable, from large loans worth hundreds, thousands or even millions of dollars to loans as small as $50 or less. If a person needs money then a loan seems to be the way to go.

When considering a loan a person needs to understand what a loan is for and what a loan is not for. Many times loans can cause trouble for a person if they do not understand what type of commitment they are getting into. Understanding loans is very important to using them correctly and getting the most out of them.

Many loans are very specific and can be used only for a certain purchase. Some other loans are a bit more lenient and may not require a specific purpose. In general it is easier to get a loan for a specific purpose then one for a general purpose. This is because lenders like to know their money is going to good use. Additionally, having a specific purpose for a loan often helps to prevent trouble down the road with meeting the loan requirements and keeping the payback commitment.

There are two sides to every loan – the lender and the borrower. The lender is the financial institution that is loaning the money and the borrower is the individual or business that is receiving the money. Both parties have a vested interest in the loan.

Lenders are not really giving the money to the borrower, though. A lender is loaning the money because it has to be paid back. Additionally, they are charging the borrower for the money they lent to them.

Borrowers have an obvious interest in the loan because they need the money and they have no other way in which to get it.

It is only through working together that a lender and borrower can come to the loan agreement and both sides can what they want out of the deal.

Loans are a big financial investment. At some point in most people’s lives the need for a loan will come up and when that time comes it helps to have an understanding of what a loan is and what loan options there are.

Reasons To Get A Loan

  • Buy a vehicle.
  • Buy a home or property.
  • Make improvements to a home.
  • Start a business.
  • Invest money into a business.
  • Buy commercial property.
  • Build commercial property.
  • Consolidate debts.
  • Get a line of credit.
  • Get a loan on a pay check or other future money yet to be received.
  • Finance a college education.
  • Other reasons


Two Categories OF Loans

There are two main categories of loans. Every loan a person can get is going to fall into one of these categories. It is important to understand both categories because they are quite different and the requirements for them are also different.


Secured loans are loans that require you to put up some type of security in order to get the loan. The security put up for a loan is called collateral. Lenders are more likely to extend secured loans because with a secured loan they have the collateral that they can seize should you default or fail to pay the loan.

There are many different types of collateral, but usually the collateral will be something related to the loan. For example, if you are getting a home loan or mortgage, then the home you are buying becomes the collateral. If you default on the loan then the lender may take your home as payment or partial payment.

As you can see, though, collateral is not always going to be worth as much as the loan is worth. That is why a secured loan still requires qualification in order to get it. Lenders are not going to just give someone a secured loan because they have collateral. Later in this chapter you will learn more about qualifying for a loan and what lenders need to approve you as a borrower.


In contrast to a secured loan, an unsecured loan does not require collateral. Unsecured loans are rare because they pose a large risk to the lender. A person needs to be highly qualified and prove themselves as little risk to the lender to qualify for an unsecured loan. The major exception to this is credit cards which will be discussed later in this book.

Unsecured loans are often called signature loans because the only thing binding the agreement is the borrower’s signature. Basically, an unsecured loan is based upon a persons word which is why the lender will take a very in depth look into a borrower’s finances to ensure they are trustworthy enough to be trusted to payback the loan.

General Risks Of A Loan

A loan is a legal contract. When you fail to pay or default, as it is called, on a loan then the bank has certain rights and remedies they can use to get their money from you. The bank may do any of the following depending on the type of loan you have:

  • Seize your property.
  • Garnish your wages.
  • Freeze or seize your bank accounts.
  • Report negatively to your credit report.
  • Take you to court on civil and/or criminal charges

A loan is a serious obligation and not taking it seriously could mean you end up in a lot of trouble. Defaulting on a loan is not something to take lightly. The risks are huge and you can end up in serious financial and even legal trouble when you do not fulfil your obligations on a loan.

Let’s look more at each of the risks of defaulting on a loan:


This is usually only a risk when you put property up as collateral; however, if you own property it is always at risk when you default on a loan. Typically, the lender will have to go to court to seize your property. The exception is for an auto loan. Most people are familiar with repossession which is basically the lender taking the vehicle back.

What the lender does when they seize property is sell that property to try to get as much money from it as possible. Most often the money they get from the sale of the property is not enough to pay off what you own on the loan, so you will still face other legal ramifications.


Garnishing your wages is something the lender will have to go to court to do. Wages can not be garnished without a court order. It is usually one of the last steps the lender will take in trying to get the money you owe them. What happens is the judge will issue an order for an amount of money that is to be automatically taken each time you get paid which is then sent straight to the debtor to pay off your debt.

One of the biggest problems with garnishing wages is that you will usually have little say as to how much is taken from each check. Your employer must withhold the money or they face legal charges for going against a court order. For lenders, garnishing wages is a process they would like to avoid.

If a person receives government payments, such as social security or welfare, then the lender can not garnish those wages as it is against the law. Additionally, if a person is self employed the lender has no ability to garnish wages as it would be the same as setting up a payment arrangement since the person controls all of their earnings, instead of this being done by an employer. The government does regulate exactly how much of each check may be withheld to ensure a lender can not take everything you earn.


This is also something that is usually done after all other attempts to resolve the debt have failed. Freezing or seizing a bank account also takes a court order. This is an alternative option for the lender when a person gets government benefits or is self employed.

The court will rule that the bank must freeze your accounts. The court may rule that the lender is to get all the money in the account and that comes into the account until the debt is paid. During the time your bank account if frozen you can not do anything with it. That means you can not withdraw any money or close the account. Usually accounts are frozen to prevent you from spending the money in the account. The lender will show proof of the amount of money you have and the court can rule that you must give a portion of it to the lender to pay for the debt.


Almost any default on a loan is going to result in a negative mark on your credit report. When you are paying your loan on time and in good standing the lender will report that, so it is no surprise that once you default the lender will report that, too.

A negative report from a lender regarding a loan is going to have a very harmful impact on your credit. It will cause problems with your ability to be approved for credit in the future. It may also extend to problems when you attempt to set up utilities such as power and heat.

Utility companies often check credit reports and they require higher deposits for customers who have a bad credit report. Some employers also check credit reports and use them as part of their hiring decision. A negative report on your credit is something that can cause a lot of hassle and problems for you in the future.


Most loans can result in civil court charges. These types of charges are used to get a payment arrangement set up or for things like wage garnishing or bank account seizing. They are handled in a municipal or small claims court, depending on the amount owed to the lender and are only for monetary damages. You can not get sent to jail over charges in civil court.

Criminal charges are a possibility, though, in some cases. Payday loans are a good example of when criminal charges may be filed. A payday loan is secured with a check and when you fail to pay it back the payday lender can press charges against you for writing a bad check. Depending on the amount the charges can be either a misdemeanor or a felony.

Criminal charges can also be filed when you fail to follow a court order; however, these charges are filed by the state, not by the lender. It is important to see how defaulting on a loan can lead to situations where you could go to jail.

There is a general process that lenders will follow when they collect on a loan. It can vary depending to the type of loan, specifically in the case of a home loan, but this is the general format for collecting on a loan debt:

  • Written notices sent to borrower
  • Phone calls made to borrower
  • Account sent to collections
  • Collection letters sent
  • Collection phone calls made
  • Negative reporting on credit record
  • Claim made in court to recover amount due

These are very general guidelines. As mentioned, different loans mean different collection methods. Some of these different collection methods will be outlined in later chapters.

General Considerations For Approval Of A Loan

As you can see getting a loan is a major decision. There are plenty of risks associated with a loan and you have to make some considerations before you sign the loan contract so you can make sure that it is the right thing for you to do.

The lender will also make considerations about whether or not they should give you a loan. The lender is always thinking about your ability to repay and if you appear to be trustworthy enough to repay the loan. They have a process that they go through to help them qualify you for the loan.

You should also carefully look at your options before signing a loan contract. This is major financial undertaking and it is important that you make sure it is really what you want to do. After all, the lender is not the only one at risk here if the agreement doesn’t end well.

The process of your considerations and the lender’s considerations before the signing of a loan contract is important. Both you and the lender should agree that the loan is a good idea for you and something that is not going to put you or them at risk in the future.


You need to take an honest look at why you want to get the loan and if it is something that fits into your budget. You need to understand that getting a loan is not a good solution when you have financial problems. Here are some things to consider:

  • What is the specific purpose for getting the loan?
  • Are you currently in a good financial position?
  • Will you be able to make the monthly loan payment?
  • Is there an alternative option instead of getting a loan?

You should always have a good reason for getting the loan. If you can not think of a legitimate need for the loan then you should probably not be getting the loan. You current finances should be in order and you should not be struggling with debt. If you are not in good financial shape then now is not the time to be getting into a new financial agreement. You should always go over your monthly budget and make sure that the new loan payment will fit in. You should not have to struggle or strain to meet the loan payment, either. It should fit nicely into your monthly budget or you should consider waiting until you are in a better financial position before getting the loan. Lastly, since a loan is such a large investment you should consider alternative options first. Once you have exhausted all other methods then you can go get a loan.


As mentioned, the lender is going to consider your ability to repay and their ability to trust that you will repay. The lender is going to consider different aspects of your finances and your character to determine if you are a good candidate for a loan. Some things they will consider are:

  • What the purpose is for the loan.
  • Your credit score and credit report.
  • Your employment history and status.
  • Your current financial state.
  • Your standing with other lenders.
  • Collateral you can offer to secure the loan.

You need to know what the lender will consider when qualifying you for a loan because knowing this information will help you to be best prepared when applying for the loan.

Now you have the basic information you need to start thinking about getting a loan. You have learned the reasons to get a loan, the categories of loans, the risks and the considerations both you and the lender make in the loan process. You are ready to begin learning more about each of the different types of loans you can get.

LOAN GUIDE – Everything You Always Wanted To Know About Loans

Part 1 – Getting An Auto Loan
Part 2 – Home Loans
Part 3 – Commercial Loans
Part 4 – Personal Loans
Part 5 – Student Loans
Part 6 – Securing A Loan
Part 7 – Loan Application

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