What is a loan?
Whenever an individual or group of people like a business entity has a lesser amount of funds that what is actually required to meet its objectives and goals, then it may require to take a loan. This excess amount is provided by a resourceful individual or a financial institution and charge some interest rate as a return for the money lent. A loan is often referred to as a credit extended to another party.
Some common terminologies include the following:
- Person or entity that gives the loan is called the creditor
- Person or entity that receives the loan is called debtor or borrower
- Amount of loan is called credit amount
- Return on loan is called interest rate
- Duration of loan is called term period
The loan approval is a formal process that requires the completion of a lot of procedures and pre-requisites. It is essential that some designated body authorizes the credit disbursement. This process is often carried out through the credit authorization form. Some common contents of the credit authorization form include the name of the borrower, the reason for taking the credit or loan, time period, interest rate and the collateral used for the loan. This form is submitted to the designated authorities to ensure credit disbursement. Once the borrower has fulfilled the terms and conditions of the credit authorization body and submitted all the supporting documents required, the credit is released and can be utilized by the borrower as per his or her requirements.
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