LeoGlossary: Loans

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A credit instrument in which money is lent from one party to another in return for a stream of payments that include principal value. The loan carries with it a certain interest rate which is paid on top of the principal.

The interest is what provides the incentive for people to lend.

Most economies depend upon loans for expansion. Many goods that are considered high ticket items cannot be paid in cash. Businesses also find the use of credit to be an acceptable part of corporate finance. When looking at it from a return perspective, if a higher amount can be generated as compared to the interest rate, this ends up being a net positive.

Impact On The Money Supply

Loans are directly tied to the money supply in much of the world. Roughly 80% of the currency operates under a fractional reserve banking system. That means that commercial bank money is what the general economy actually uses.

Central banks are responsible for the physical currency, both banknotes and the distribution of coins. However, in the digital era, we do not use physical money for many transactions let alone for settlement. This means that the economy is driven by digital currency.

This is what the commercial banks create. It is done through the creation of loans. When those are made, the money supply expands. As principal is paid down (or defaults), contraction takes place.

It is the reason why economic expansion is dependent upon loans. The money supply much expand to increase economic productivity. Money is not wealth which is why straight "money printing" for countries that can do that never worked. Instead, wealth comes from business, commerce, and economic engagement.

Types of Loans

There are basically two types of loans: secured and unsecured.

A secured loan as some asset put as collateral. Unsecured, on the other hand, has no collateral and is based upon the standing of the borrower.

  • Personal loans
  • Auto loans
  • Student loans
  • Mortgage loans
  • Home equity loans
  • Credit-builder loans
  • Loans from friends/family
  • Payday loans
  • Auto title loans
  • Pawn shop loans

Some of these are secured like mortgages while others can be unsecured such as different types of personal loans.


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