A loan is an arrangement under which a lender allows another party the use of funds in exchange for an interest payment and the return of the funds at the end of the lending arrangement. Loans provide liquidity to businesses and individuals, and as such are a necessary part of the financial system.
The terms associated with a loan are contained within a promissory note. These terms may include the following:
- The interest rate to be paid by the borrower, which may be a variable or fixed rate
- The maturity date of the loan
- The size and dates of the payments to be made to the lender
- The amount of any collateral to be posted against the note
A loan that can be called by the lender is a demand loan. If a loan is to be repaid over time in accordance with a fixed schedule, it is called an installment loan.