The concept of loans dates back to the mists of time, and reams of historical documents exist that go back thousands of years. But the oldest available records could be found in Assyria and Babylonia where farmers and traders were given grain loans by the merchants of the time.
In Europe, it was during the 13th century when lending came into existence as churches understood the financial benefits of revenue in the form of interest.
The Evolution of Loans
The practice of lending evolved in the middle ages when the ways of borrowing money was seeing rapid changes. The Indentured loan was a way that was practiced from the middle ages through the seventeenth century in which money was borrowed for buying land or a house. But there were some unscrupulous lenders who inflated the debt or interest payments, leading to the borrower effectively turning into a slave.
It was during the time of indentured loans that some lenders recognized the importance of repeat custom and were involved in the practice of sustainable lending. In Italy, stalls were set up in local markets that served to lend money at a certain interest as loan and the borrower was supposed to pay back the borrowed many at certain intervals. It is this practice that turned into the modern idea of loans that are offered by banks. The word “Bank” itself is derived from “banca” which was the place on which trading was conducted by the money lenders. The problem with the earlier system of loans was that there were different rates of interest that were charged by the lenders and which were not governed by any central authority.
In the event of not making enough money, the lender would smash his bench (“bank rupta”) and went for some other job. The modern “bankruptcy” originated from this early practice, though with a different implication.
Modern Banking Loans
Nowadays, money lending has a greater control by some central authority (banks or financial authority) as money lenders are regulated by these authorities and there are almost no chances of losing your kneecaps to some unscrupulous lenders.
Types of Loans
Here are short descriptions on the types of loans that are prevalent today.
When a secured loan is taken, the borrower offers an asset as collateral. This asset could be your house, car, pet tortoise or whatever the bank considers sufficient enough to service the debt in the event of the borrower failing to repay. This type is common during buying of a house or a car.
Unlike the secured type, the unsecured lending is not secured against your assets and as part of protection higher interest rates are assigned to this type of loans. Some examples of this type include:
· Personal loans
· Credit cards
· Bonds (issued by corporations)
· Overdrafts on your bank account
This type of loan is offered as unsecured, though in the main, it is secured. No fixed repayment dates exist and the interest rates also vary. The term Demand Loans originated because the lender can ask at any time for repayment.
In this loan, the interest rate charged is usually below the market rate. The concessional loans are offered by governments to poorer countries, though many financial organizations also offer its employees this benefit.