What is a loan?

A loan is money that someone borrows from another person or business. The borrower agrees to pay back the amount borrowed plus interest over a period of time.

Oxford Languages

a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

“borrowers can take out a loan for $84,000”

Merriam Webster Online

money lent at interest

“took out a loan to pay for the new car”

something lent usually for the borrower’s temporary use


In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt until it is repaid as well as to repay the principal amount borrowed.

The document evidencing the debt (e.g., a promissory note) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.

How loans work

There are two main types of loans: secured and unsecured. Secured loans require collateral as part of the agreement. Unsecured loans do not require collateral.

If you need money quickly, an unsecured loan might be right for you. These loans are usually easier to obtain than other types of loans. However, there are some risks involved with these loans. Before applying for a loan, consider whether you will be able to pay back the loan. If not, you should think twice before taking out a loan.  Once you receive an approval letter, you need to make sure you understand what happens next. This includes how much money you will borrow when you will repay the loan and any fees associated with the loan.

Different types of loan

There are several types of loans available to consumers. These include personal loans, auto loans, home equity lines of credit (HELOC), student loans, mortgages, and small business loans. Personal loans are typically used to pay off debts, consolidate multiple bills into one payment, or finance purchases. Auto loans are used to purchase cars, trucks, motorcycles, boats, recreational vehicles, and more. Home equity lines of credit allow homeowners to use their existing homes as collateral to obtain additional funds. Student loans are used to help fund education expenses. Mortgages are used to purchase homes. Small business loans are used to start up new businesses.