What are loans?
By definition, a loan is a sum of money lent to another entity with the promise to pay after a certain amount of time. Moreover, it is a credit vehicle that is typically borrowed from financial institutions like banks. And upon payment, the borrower is to pay principal with added interest.
How do loans work?
When you obtain a loan, you incur debt. In return, you are subjected to certain agreements, terms, or conditions. The agreements will include how much interest will be applied to your debt balance, the amount of time you have to pay for your loan, other charges you will be subjected to, and more.
But before you get a loan, you first have to go through a whole application process to assess whether you are suited to acquire a loan. During this process, you may need to provide some documents like proof of identity, employer and income verification, proof of address, and more. Depending on the loan, you may be obligated to provide collateral or other provisions.
Once you get approved for a loan, your agreed interest rate will be applied to your loan's balance and will accumulate over time. This, plus the principal amount of your loan, will total how much you are obliged to pay the financial institution back.
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