A loan is a sum of money that a person or a bank lends to another person on a temporary basis in return for the payment of interest. The person or institution providing the money is also known as the lender. The other person or party involved is the borrower. As a rule, loans are paid out as a lump sum and repaid in regular instalments. The framework conditions for the loan are laid down in a contract. The conditions include the fixing of a term at the end of which the money must be repaid. The interest rate and repayment amounts are also set out in the contract.
Loans and credit – what’s the difference?
In everyday language, the terms loan and credit are often used interchangeably. But there are clear differences:
Credit is the generic term for money lending of any nature. In addition to loans, there are also types of credit that do not constitute loans, such as guarantees.
A loan is therefore a type of credit. Loans usually involve larger sums of money and longer terms.
Types of loan: a brief overview
There are various different types of loan, which differ mainly in terms of interest and repayment. The following are some of the most common:
Payment of the total amount borrowed at the end of the term
Monthly payments only cover the interest
Conventional loan for the purchase of real estate with invariable monthly instalments made up of interest and the repayment rate
The current best interest rate is fixed for 5 years
Also known as an interest rate bet, since the risk depends on changes to the interest rate
Variable loan with flexible interest rates based on the Euribor rate
Transparent and affordable in the long term
Ideal for tradespeople, since invariable repayment amounts are agreed independently of the interest rate, with interest being added to those repayment amounts
The amount of interest that is to be paid reduces over time
Crowdinvesting, for example for real estate projects, usually involves a large group of people coming together to make an amount available to an entrepreneur or founder. The individual lenders are able to choose the amount that they contribute. If the required sum is collected, it is paid out as a loan to the project creator. The preferred form of funding for crowdinvesting is usually the participatory loan, also known as a subordinated loan. It offers investors an alternative investment opportunity, which is primarily based on attractive returns. For the lender, this means that repayment by the borrower does not take place monthly, but in the form of a one-off payment at the end of the term.