A loan is a sum of money lent to a borrower with the expectation of repayment. The borrower receives the principal, agrees to pay interest, and promises to repay the principal by a certain date or over a series of payments. The lender takes the risk that the borrower will default. That risk determines the interest rate and the terms.

Loans come in many forms. A mortgage is secured by real estate and repaid over 15 to 30 years. An auto loan is secured by the vehicle and repaid over three to six years. A personal loan is usually unsecured and repaid over two to seven years. A student loan may be subsidized or unsubsidized, with repayment deferred until after graduation. A business loan may be secured by inventory, receivables, or equipment.

The underwriting process determines whether a loan is approved and on what terms. Lenders review credit history, income, assets, and collateral. They calculate the debt-to-income ratio and check the credit score. For mortgages, they also order an appraisal and verify employment. The process takes days for a personal loan and weeks for a mortgage.

Defaults happen. When they do, lenders pursue collection, repossess collateral, or write off the debt. A written-off loan stays on the borrower's credit report for seven years. It is a serious mark. Borrowers who communicate with lenders before missing a payment often have better options, including hardship programs and modified repayment plans.