A loan is a financial agreement between two parties, in which one party (the lender) provides money to another party (the borrower) and requires repayment with or without interest. Depending on the borrowing party’s needs and financial situation, loans can be secured by collateral or be unsecured. Secured loans require a pledged asset as collateral, such as a vehicle or house, that the lender can repossess in the event of nonpayment. Unsecured loans involve no collateral, but rather, the promise of repayment. The first step in taking a loan is applying for one, and potential borrowers should carefully consider the lender, terms, and amount.

Borrowers hoping to qualify for a loan should know their own financial situation and come prepared with supporting documents that show their credit history and current financial standing. Qualifying requirements and loan terms vary by lender and may include employment verification, recent pay stubs, credit checks, or bank statements. The lender will consider a person’s income, credit score, and debt levels to determine the loan and determine if the borrower would be able to handle the responsibility of repayment.

Borrowers who can qualify for a loan may be eligible for a revolving loan or line of credit, or a term loan. Revolving loans or lines of credit can be spent, repaid, and spent again. These types of loans—commonly seen as credit cards—offer convenience and flexibility but may carry higher annual percentage rates. Term loans are fixed-rate and usually have fixed payment amounts for the life of the loan. They are typically offered for larger amounts, like car loans and mortgages, and offer relatively lower interest rates.

For lenders looking to offer a loan, risk evaluation is perhaps the most important factor in decision making. Lenders may be more comfortable granting a loan when collateral is pledged due to the decreased risk. Risky borrowers may be offered a loan with an added premium based on the risk evaluation, typically seen as a higher interest rate.

A loan is a beneficial tool in achieving financial objectives, yet it’s important to remember the obligations associated with taking the loan. Potential borrowers should have a good understanding of their own financial limitations and goals before committing to a loan.