In finance, a loan is the lending of money from one individual,
organization or entity to another individual, organization or entity.
A loan is a debt provided by an organization or individual to another
entity at an interest rate, and evidenced by a promissory note which
specifies, among other things, the principal amount of money borrowed,
the interest rate the lender is charging, and date of repayment. A
loan entails the reallocation of the subject asset(s) for a period of
time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of
money, called the principal, from the lender, and is obligated to pay
back or repay an equal amount of money to the lender at a later time.
The loan is generally provided at a cost, referred to as interest on
the debt, which 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, which can also place the borrower under
additional restrictions known as loan covenants. Although this article
focuses on monetary loans, in practice any material object might be
Acting as a provider of loans is one of the principal tasks for
financial institutions such as banks and credit card companies. For
other institutions, issuing of debt contracts such as bonds is a
typical source of funding.
2 Target markets
4 Abuses in lending
United States taxes
5.1 Income from discharge of indebtedness
6 See also
A secured loan is a loan in which the borrower pledges some asset
(e.g. a car or property) as collateral.
A mortgage loan is a very common type of loan, used by many
individuals to purchase things. In this arrangement, the money is used
to purchase the property. The financial institution, however, is given
security – a lien on the title to the house – until
the mortgage is paid off in full. 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.
In some instances, a loan taken out to purchase a new or used car may
be secured by the car, in much the same way as a mortgage is secured
by housing. The duration of the loan period is considerably
shorter – often corresponding to the useful life of the car.
There are two types of auto loans, direct and indirect. A direct auto
loan is where a bank gives the loan directly to a consumer. An
indirect auto loan is where a car dealership acts as an intermediary
between the bank or financial institution and the consumer.
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 debt
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
The interest rates 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.
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 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 loans are short-term loans that typically do not have fixed
dates for repayment. Instead, demand loans carry a floating interest
rate which varies according to the prime lending rate 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
A subsidized loan is a loan on which the interest is reduced by an
explicit or hidden subsidy. In the context of college loans in the
United States, it refers to a loan on which no interest is accrued
while a student remains enrolled in education.
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 (sometimes called a perk).
Loans can also be subcategorized according to whether the debtor is an
individual person (consumer) or a business.
Credit (finance) § Consumer credit
Common personal loans include mortgage loans, car loans, home equity
lines of credit, credit cards, installment loans and payday loans. 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. For car loans in the U.S.,
the average term was about 60 months in 2009.
Main article: Business loan
Loans to businesses are similar to the above, but also include
commercial mortgages and corporate bonds. Underwriting is not based
upon credit score but rather credit rating.
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:
displaystyle P=Lcdot frac c,(1+c)^ n (1+c)^ n -1
For more information see Compound interest#Monthly amortized loan or
Abuses in lending
Predatory lending 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 him or her; subprime
mortgage-lending and payday-lending are two examples. Where the
moneylender is not authorized or regulated, the lender could be
considered a loan shark.
Usury 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
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 abusing the
lender by not repaying the loan or with an intent to defraud the
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
1. A loan is not gross income to the borrower.:111 Since the
borrower has the obligation to repay the loan, the borrower has no
accession to wealth.:111
2. The lender may not deduct (from own gross income) the amount of the
loan.:111 The rationale here is that one asset (the cash) has been
converted into a different asset (a promise of repayment).:111
Deductions are not typically available when an outlay serves to create
a new or different asset.:111
3. The amount paid to satisfy the loan obligation is not deductible
(from own gross income) by the borrower.:111
4. Repayment of the loan is not gross income to the lender.:111 In
effect, the promise of repayment is converted back to cash, with no
accession to wealth by the lender.:111
Interest paid to the lender is included in the lender’s gross
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.:111
Interest income can be
attributed to lenders even if the lender doesn’t charge a minimum
amount of interest.:112
Interest paid to the lender may be deductible by the
borrower.:111 In general, interest paid in connection with the
borrower’s business activity is deductible, while interest paid on
personal loans are not deductible.:111The major exception here is
interest paid on a home mortgage.:111
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.:111 Thus, if a debt is discharged, then the
borrower essentially has received income equal to the amount of the
Internal Revenue Code
Internal Revenue Code lists "Income from Discharge
of Indebtedness" in Section 61(a)(12) as a source of gross income.
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) of the
Internal Revenue Code.
Annual percentage rate
Annual percentage rate (a.k.a. Effective annual rate)
Bank, Fractional-reserve banking, Building society
Debt, Consumer debt,
Debt consolidation, Government debt
Finance, Personal finance, Settlement (finance)
Interest-only loan, Negative amortization, PIK loan
Pay it forward
Refund Anticipation Loan
Federal student loan consolidation
Federal Perkins Loan
George D. Sax and the Exchange National
Bank of Chicago - Innovation
of instant loans
Student loan default
^ Signoriello, Vincent J. (1991), Commercial
Loan Practices and
Operations, ISBN 978-1-55520-134-0
Loan - Definition and Overview at About.com. Retrieved
^ Concessional Loans, Glossary of Statistical Terms, oecd.org,
Retrieved on 5/5/2013
^ "Average new-car loan a record 65 months in fourth quarter".
Reuters. August 6, 2017. Retrieved 2017-08-06.
^ Guttentag, Jack (October 6, 2007). "The Math Behind Your Home Loan".
The Washington Post. Retrieved May 11, 2010.
^ "Predators try to steal home". money.cnn.com. [CNN]. 18 Apr 2000.
Retrieved 7 Mar 2018.
^ Horsley, Scott; Arnold, Chris (2 Jun 2016). "New Rules To Ban Payday
Debt Traps'". National Public Radio. Retrieved 7 Mar
Credit card holders pay Rs 6,000 cr 'extra'". The Financial Express
(India). Chennai, India]. 3 May 2007. Archived from the original on
^ a b c d e f g h i j k l m n o p Samuel A. Donaldson, Federal Income
Taxation of Individuals: Cases, Problems and Materials, 2nd Ed.
^ See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) (giving
the three-prong standard for what is "income" for tax purposes: (1)
accession to wealth, (2) clearly realized, (3) over which the taxpayer
has complete dominion).
^ 26 U.S.C. 61(a)(4)(2007).
^ 26 U.S.C. 61(a)(12)(2007).
^ 26 U.S.C. 108(2007).
^ EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 Banks Need
Long-Term Rainy Day Funds
Debtor-in-possession (DIP) financing
Collection · Evasion
Tax refund interception
Consumer leverage ratio
Debt levels and flows
External / Internal / Odious debt