The purpose of Loan and its Obligations


The term loan most consumers have heard before, especially since this is often used as a synonym for the word credit . But what is a loan, what is the purpose of a loan, and what are the obligations of the borrower and the lender? See for an illustration

Definition: What is a loan?

 Definition: What is a loan?

A loan, which is commonly referred to as credit, is a contract of law. The basis for this contract are the regulations of the Civil Code (BGB). Contracting parties are usually two parties, one being the lender and the other the borrower. The loan agreement essentially contains the agreement that the lender leaves to the borrower for a fixed period of time a certain capital sum, the loan amount. The content of a loan is almost always the interest payment paid by the borrower as compensation for the transfer of capital to the lender.

What commitments do lenders and borrowers make?


As in any contract, there are also obligations under a loan agreement that both parties enter into with the contract. In the case of a loan, the lender first makes the commitment to transfer the agreed loan amount to the borrower or, more generally, to make it available. At the same time, this is the principal obligation of the lender. On the other hand, the principal obligation of the borrower is to pay the agreed interest on the one hand and, of course, also to repay the capital received. Both are done in most cases, but depending on the type of loan, as part of the loan installments, which are paid in most cases on a monthly basis. Loans are almost always linked to an interest rate, although it is not legally established that the lender must charge interest to the borrower.

Is there a difference between credit and loan?

 Is there a difference between credit and loan? As mentioned earlier, the two terms loan and credit are used in most cases as synonyms. However, according to the BGB, there is a distinction, which, however, only affects the strict definition. Thus, strictly speaking, a loan is only a capital loan that is intended for a medium to long-term period . In contrast, the strict definition of the loan is such that the money in this case is lent for a shorter period . In practice, this distinction is hardly or not at all important, because the customer ultimately does not care whether he uses a loan or a loan to finance.

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