What is a loan? or what is credit?
Prior to knowing what a loan is, it is better to know that there are 2 parties to a loan transaction:
1. Lender and 2. Borrower. Lender is the one who lends money and borrower is the one who borrows money.
A loan (credit) is a financial transaction or financial agreement between lender and borrowers. A lender can be a group of individuals or institutions lending money to a single or a group of borrowers.
During the times when there were no organised banks, ‘money lenders’ lent money to individuals.
A bank(s) or financial institution(s) lends to the borrower(s) at their own discretion. While bank lends money, there is an agreement made known as Loan Agreement in which the specific terms of a loan or finance are provided. Banks usually charge interest in addition to the original amount of the loan. The money lent by bank is known as Principal. So there are basically 2 repayments that the borrower is supposed to repay: 1. Principal and 2. Interest.
Borrower needs to agree to the terms of the bank such as principal payment, interest payments and due dates for repayment.
Lenders or banks usually collect the payment through EMI-Equated Monthly Installments. This means that the borrower repays a fixed amount of money throughout the tenor of the loan or finance every month. The repayment due dates can be decided as per the requirement of the borrower like fortnightly, monthly, quarterly, semi-annually, annually and so on.
Loans (aka credit) can be of various types; Personal Loans, Credit Cards, Home Loans, Business Loans and so on and are structured to meet the need of the consumers.
In the UAE-United Arab Emirates, there are 2 types of banks: 1. Conventional Banks and 2. Islamic Banks.
Conventional Banks are the banks which follow conventional set of rules while processing their transactions. Whereas Islamic banks follow banking as per the Sharia Law as specified in the Quran.(I will write in detail in a future article)
Download monthly installment calculator HERE. This calculator provides monthly installment.
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