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In the global economic meltdown that’s currently wreaking havoc on nearly everything under the sun, there’s one word that people are guaranteed to hear: loans.  Most of this crisis, both the underlying cause and the problems that have resulted, revolve around the institution of credit and of borrowing and repaying debt.  Bad loans caused the collapse, which in turn is making good loans more difficult to obtain.  Is there a solution? No one knows.  Governments around the world are trying to invent one.  If you don’t understand loans, your chances of understanding even a glimmer of the economic situation are slim to none.  Keep reading for some basic information.

Loans are really quite a simple concept. Simply put, a loan occurs whenever someone borrows money from someone else to make a purchase.  At that point, the person who borrowed the money (the debtor), makes a promise to the person to loaned the money (the lender) that he or she will repay the money, plus interest, over a period of time.  That’s as simple as it is.  When you think about it, it’s astonishing that such a basically simple thing got so complicated and so convoluted as to cause this whole economic mess.

Loans are used for all kinds of things.  Some of the more major types of loans include home loans (called mortgages or home equity loans), car loans, and student loans (which students borrow to pay the costs of higher education and then often spend a lifetime trying to repay).  Credit cards could also be called loans, since the card company is basically loaning the use the money for his or her purchases, but revolving credit typically isn’t considered an actual loan.  Loans have set amounts, set interest rates, and set repayment times.  It is the last two factors that have caused the most trouble recently.

Due to our economy’s shift from a cash-based economy to a credit-based economy, most people think little of taking out a loan, signing a promissory note, and then beginning monthly payments.  In fact, it’s been said that the average consumer thinks in terms of cost per month instead of total cost for big-ticket items such as cars and homes.  This can be a costly mistake!  High interest rates cause loans to drag on for way too many years, and adjustable interest rates can make the monthly payments too high to be affordable, causing many borrowers to end up in foreclosure or some other type of repossession activity.  Loans can be a good thing, but need to be scquired carefully and taken seriously.