Personal finance is the application of the principles of finance to the monetary decisions of an individual or family
unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time,
taking into account various financial risks and future life events. Components of personal finance might include checking and savings
accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits,
insurance policies, and income tax management.
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and
In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay
an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity,
each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the
lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower
under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds
is a typical source of funding.
A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used
to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off
in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
Auto loans - financing a new or used vehicle.
Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry a
lower interest rate than other loans and are usually issued by the government. Often they are supplemented by student grants which do not have to
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed
interest rate or for the convenience of servicing only one loan.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured
loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization
of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of
the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest
rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their
property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner,
incurring less interest.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take
advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for
mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in
order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are
willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop
for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending. Certainly many, if not most,
debt consolidation transactions do not involve predatory lending
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