A loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, or other entities in finance. The recipient (i.e., the borrower) incurs a debt and is typically required to pay interest on that debt until it is repaid, in addition to repaying the principal amount borrowed.
The document evidencing the debt (for example, a promissory note) will typically specify the principal amount of money borrowed, the interest rate charged by the lender, and the date of repayment. A loan involves the reallocation of the subject asset(s) between the lender and the borrower for a set period of time.
The interest serves as an inducement for the lender to make the loan. Each of these obligations and restrictions is enforced by contract in a legal loan, which can also impose additional restrictions known as loan covenants on the borrower. Although this article focuses on monetary loans, any material object can be lent in practice.
One of the primary functions of financial institutions such as banks and credit card companies is to make loans. The issuance of debt contracts, such as bonds, is a common source of funding for other institutions.