What is a loan?

A loan is best understood as a contractual promise between a borrower and a lender. In this arrangement, the borrower receives a sum of money from the lender with the agreement that the borrower will repay that amount, often with interest, over a specified period. This relationship is formalized through a loan agreement, which outlines the terms, conditions, and obligations of both parties.

The significance of this definition lies in the contractual nature of loans, emphasizing the legal obligations and the timeframe for repayment. It underscores that this is not merely a transaction or an investment, but a legally binding commitment that governs the exchange of funds. This understanding is crucial in retail banking, as it allows individuals and institutions to manage their finances through borrowing, enabling growth, development, and consumption.