A personal loan is a specific kind of debt. In case of a loan the financial assets are redistributed over a period of time normally between the borrower and the lender like all other debt instruments. The process of this loan mainly involves two steps as:
1. The specific sum of money required by the borrower is initially given by the lender which is known as the principal for a stipulated amount of time.
2. In turn the borrower is duty-bound to repay or pay back the total amount of the principal plus the amount of interest calculated during that period over the principal amount to the lender after the completion of the time period.
In general the principal amount and the interest are paid back in the form of normal installment loan or may be in partial installments or in the form of annuities. It is important to remember that each installment amount should be the same.
Interest is nothing but the additional money that is charged by the lender for providing a certain amount of money to the borrower as debt. The interest acts as an incentive in case of the lender which encourages him to provide the loan. In case of legal loans, the two parties concerned in the case are enforced to sign a contract for the obligations and restrictions. It can also place the borrower under additional restrictions called loan covenants. The principal task of the financial institutions is that they act as a provider of the loan amount.