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In
finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available which could ...

finance
, a loan is the lending of
money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 174x174px Money is any item or verif ...

money
by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...

interest
on that debt until it is repaid as well as to repay the principal amount borrowed. The document evidencing the debt (e.g., a
promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal Law is a system of rules created and law enforcement, enforced through social or governmental institutions to regulate behavi ...
) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. A loan entails the reallocation of the subject
asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
(s) for a period of time, between the
lender A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...
and the
borrower A debtor or debitor is a legal entity, legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterp ...
. The interest provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by
contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; ...
, which can also place the borrower under additional restrictions known as
loan covenantA loan covenant is a condition in a commercial loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a de ...
s. Although this article focuses on monetary loans, in practice, any material object might be lent. Acting as a provider of loans is one of the main activities of
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity ...
s such as banks and credit card companies. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.


Personal loan


Secured

A
secured loan A secured loan is a loan in which the borrower Pledge (law), pledges some asset (e.g. a car or property) as collateral (finance), collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus ...
is a form of debt in which the borrower pledges some asset (i.e., a car, a house) as
collateral Collateral may refer to: Business and finance * Collateral (finance) In loan agreement, lending agreements, collateral is a Borrower, borrower's pledge (law), pledge of specific property to a lender, to Secured loan, secure repayment of a loan. ...
. A
mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
is a very common type of loan, used by many individuals to purchase residential property. The lender, usually a financial institution, is given security a
lien A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the person ...

lien
on the title to the property until the mortgage is paid off in full. In the case of home loans, if the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. Similarly, a loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. In a direct auto loan, a bank lends the money directly to a consumer. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer. Other forms of secured loans include loans against securities – such as shares, mutual funds, bonds, etc. This particular instrument issues customers a line of credit based on the quality of the securities pledged. Gold loans are issued to customers after evaluating the quantity and quality of gold in the items pledged. Corporate entities can also take out secured lending by pledging the company's assets, including the company itself. The interest rates for secured loans are usually lower than those of unsecured loans. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate the quality of pledged collateral before sanctioning the loan.


Unsecured

Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages: *
Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. ...
s *
Personal loans Personal may refer to: Aspects of persons' respective individualities * Privacy * Personality * Personal, personal advertisement, variety of classified advertisement used to find romance or friendship Companies * Personal, Inc., a Washington, D ...
*
Bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital ma ...
overdraft An overdraft occurs when money is withdrawn in excess of what is on the current account. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn i ...
s * Credit facilities or lines of credit *
Corporate bond A corporate bond is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with ...
s (may be secured or unsecured) *
Peer-to-peer lending Peer-to-peer lending, also abbreviated as P2P lending, is the practice of loan, lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services onlin ...
The
interest rate An interest rate is the amount of interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investm ...
s applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the
Consumer Credit Act 1974 The Consumer Credit Act 1974c 39 is an Act of the Parliament of the United Kingdom The Parliament of the United Kingdom is the Parliamentary sovereignty in the United Kingdom, supreme Legislature, legislative body of the United Kingdom, th ...
. Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It ...
are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.


Demand

Demand loans are short-term loans that typically do not have fixed dates for repayment. Instead, demand loans carry a
floating interest rate A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a de ...
, which varies according to the
prime lending rate A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some Floating interest rate, variable interest rates may be expressed as a percentage above or below p ...
or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.


Subsidized

A subsidized loan is a loan on which the interest is reduced by an explicit or hidden
subsidy A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the term ...

subsidy
. In the context of college loans in the
United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., federal di ...

United States
, it refers to a loan on which no interest is accrued while a student remains enrolled in education.


Concessional

A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or a combination of both. Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an
employee benefit Employment is the relationship between two parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; cropped away black border edge.jpg, 300px, ''Hip, Hip, Hurrah!'' ( ...
(sometimes called a ''perk'').


Target markets

Loans can also be categorized according to whether the debtor is an individual person (consumer) or a business.


Personal

Common personal loans include
mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
s, car loans, home equity lines of credit,
credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. ...
s,
installment loanAn installment loan is a type of agreement or contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable becaus ...
s, and
payday loans A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a short-term unsecured debt, unsecured loan, often characterized by high interest rates. The term "payday" in payday ...
. The credit score of the borrower is a major component in and underwriting and interest rates ( APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders.


Commercial

Loans to businesses are similar to the above but also include
commercial mortgage A commercial mortgage is a mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. Th ...
s and
corporate bond A corporate bond is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with ...
s and government guaranteed loans. Underwriting is not based upon credit score but rather
credit ratingA credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor Default (financ ...
.


Loan payment

The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time. The fixed monthly payment ''P'' for a loan of ''L'' for ''n'' months and a monthly interest rate ''c'' is: :P = L \cdot \frac For more information, see monthly amortized loan or mortgage payments.


Abuses in lending

Predatory lendingPredatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 ...
is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them; subprime mortgage-lending and payday-lending are two examples, where the moneylender is not authorized or
regulated Regulation is the management of complex systems A complex system is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and inf ...
, the lender could be considered a
loan shark A loan shark is a person who offers loans at Usury, extremely high interest rates, has strict terms of collection upon failure, and generally operates outside the law. Because loan sharks operating illegally cannot reasonably expect to be able ...
.
Usury ''Stultifera Navis'' ( ''Ship of Fools''), 1494; woodcut Woodcut is a relief printing technique in printmaking. An artist carves an image into the surface of a block of wood Wood is a porous and fibrous structural tissue found in the P ...
is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures, the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay the loan.


United States taxes

Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations another set of rules that interpret the Internal Revenue Code).Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007). 1. A loan is not gross income to the borrower. Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth. 2. The lender may not deduct (from own gross income) the amount of the loan. The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment). Deductions are not typically available when an outlay serves to create a new or different asset. 3. The amount paid to satisfy the loan obligation is not deductible (from own gross income) by the borrower. 4. Repayment of the loan is not gross income to the lender. In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender. 5. Interest paid to the lender is included in the lender's gross income. Interest paid represents compensation for the use of the lender's money or property and thus represents profit or an accession to wealth to the lender. Interest income can be attributed to lenders even if the lender doesn't charge a minimum amount of interest. 6. Interest paid to the lender may be deductible by the borrower. In general, interest paid in connection with the borrower's business activity is deductible, while interest paid on personal loans are not deductible. The major exception here is interest paid on a home mortgage.


Income from discharge of indebtedness

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large United may refer to: Place ...

Internal Revenue Code
lists "Income from Discharge of Indebtedness" in Section 61(a)(12) as a source of
gross income For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes ...
. Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this is treated the same way as if Y gave X $50,000. For a more detailed description of the "discharge of indebtedness", look at Section 108 (
Cancellation of Debt (COD) Income Taxpayers in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, ...
) of the
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large United may refer to: Place ...

Internal Revenue Code
.EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 201
Banks Need Long-Term Rainy Day Funds
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See also

US specific:


References

{{Authority control Loans Banking terms Notary