What is the definition of a loan?

A loan is defined as a sum of borrowed money that is expected to be paid back with interest. This definition highlights that a loan involves not just the principal amount borrowed, but also the cost associated with borrowing that money, which is the interest. Understanding this concept is critical for anyone involved in mortgage lending or financial transactions because it underscores the relationship between the lender and borrower, where the borrower receives funds upfront and commits to repaying the amount over time, typically with added interest reflecting the lender’s risk and the cost of capital.

The other options represent different financial concepts. Insurance is a risk management tool used to protect against financial loss, while a savings account is a deposit account held at a financial institution that allows for deposits and withdrawals while earning interest. A financial obligation is a broader term that could apply to any commitment to pay a specific amount of money, not just related to borrowing. Therefore, the definition of a loan as a sum of borrowed money with interest is specific and essential for understanding financing.