Intertemporal Choice


The significance of lending and borrowing

Lending and borrowing are crucially important economic activities:

What is a loan?

A loan is a financial arrangement in which a lender provides a specific amount of money to a borrower, who agrees to repay the borrowed amount (principal) along with interest. Loans are commonly used by individuals, businesses, and governments to fund various expenses, investments, or projects when immediate funds are needed but not readily available. The terms of a loan, including interest rates, repayment schedule, and collateral requirements, vary based on many factors like:

The amount of money paid back in excess of the principal (principal is the amount borrowed)
Interest Rate
Interest divided by principal, usually annualized and expressed as a percentage

Examples of loans

A mortgage is a loan made to households or businesses to purchase a property. The borrower pays back the loan with interest over a period of many years. The property serves as collateral, meaning that it can be seized by the lender if the borrower fails to make scheduled payments.

A mortgage is one of the many types of loan in the economy. Click on the tabs below to explore some real-world applications.

Personal Finance
Individuals borrow money to pay for major purchases such as homes, cars, or education. They can also lend money by putting funds in savings accounts, purchasing bonds, or extending loans to family and friends.
Business Financing
Companies will often borrow to finance operations or invest in projects. They do this by seeking loans from banks or raising funds from investors.
Government Borrowing
Governments often borrow to finance public spending on infrastructure, social programs, and other initiatives. They issue government bonds to manage budget deficit.
Real Estate
Lending and borrowing are central to real estate. Individuals and businesses obtain mortgages to purchase residential or commercial properties.