What is a loan?

A loan is defined as a debt specified by a note, which legally outlines the terms of the agreement between the lender and the borrower. This note typically includes key details such as the amount borrowed, the interest rate, the repayment schedule, and any other conditions that apply. The borrower receives funds from the lender with the understanding that they will repay the loan amount, along with any interest or fees, over a designated period.

The nature of a loan as a debt is crucial because it involves a formal obligation to repay, distinguishing it from a gift, which is given freely without expectation of return. Unlike an investment vehicle, which is aimed at generating returns over time, a loan is focused on the borrowing and repayment process. Additionally, it differs from a savings account, which is primarily used for storing money and earning interest rather than borrowing funds. Understanding the definition and terms of a loan is essential for managing personal finances effectively and making informed decisions about borrowing and debt.