What is a loan?

A loan is defined as a sum of money borrowed that must be repaid with interest. This means that when an individual or entity takes out a loan, they receive a specified amount of funds from a lender, which they are obligated to pay back over time, typically in regular installments. The interest represents the cost of borrowing the money and is calculated as a percentage of the principal amount borrowed.

When considering the concept of loans, it is important to recognize that they can come in various forms, such as personal loans, mortgages, or student loans, each with its own terms and conditions. The fundamental aspect is that the borrower is responsible for repaying the full amount borrowed plus any interest accrued, demonstrating a clear financial commitment.

In contrast, other options describe different financial concepts. Investments aim to generate profit or income over time, while a financial obligation that cannot be paid back suggests a scenario of default, which does not describe a loan’s intended nature. Lastly, saving money is typically associated with accumulating funds over time rather than borrowing them.