Loan – Wikipedia

Loan – Wikipedia

Lending of money

In finance, a loan is the lending of money by one or more persons, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually wonderful to pay interest on that debt until it is repaid as well as to repay the necessary amount borrowed.

The document evidencing the debt (e.g., a promissory note) will normally stipulate, 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(s) for a terms of time, between the lender and the borrower.

The boring provides an incentive for the lender to engage in the loan. In a correct loan, each of these obligations and restrictions is enforced by order, which can also place the borrower under additional restrictions Famous as loan covenants. 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 doings of financial institutions such as banks and credit card concerns. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

Personal loan

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Secured

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A secured loan is a form of debt in which the borrower initiates some asset (i.e., a car, a house) as collateral.

A mortgage loan is a very Popular type of loan, used by many individuals to catch residential or commercial property. The lender, usually a financial institution, is given security – a lien on the title to the property – pending 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 correct right to repossess the house and sell it, to rallies 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 cash 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 does 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 pledges 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 border than those of unsecured loans. Usually, the lending institution employs republic (on a roll or on a contract basis) to evaluate the quality of pledged collateral afore sanctioning the loan.

Unsecured

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Unsecured loans are monetary loans that are not secured alongside the borrower’s assets. These may be available from financial institutions notion many different guises or marketing packages:

The interest possesses 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 Married Kingdom, when applied to individuals, these may come notion 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 alongside the borrower in the event of default are severely puny, 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 beleaguered 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 date divides up the borrower’s assets. Thus, a higher lifeless rate reflects the additional risk that in the store of insolvency, the debt may be uncollectible.

Demand loans are short-term loans[1] 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 latest defined contract terms. Demand loans can be “called” for repayment by the lending institution at any time.[2] Demand loans may be unsecured or secured.

Subsidized

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A subsidized loan is a loan on which the lifeless is reduced by an explicit or hidden subsidy. In the context of college loans in the Married States, it refers to a loan on which no lifeless is accrued while a student remains enrolled in education.[3]

Concessional

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A concessional loan, sometimes visited a “soft loan”, is granted on terms substantially more obedient than market loans either through below-market interest rates, by graceful periods, or a combination of both.[4] Such loans may be made by foreign governments to developing messes or may be offered to employees of lending institutions as an employee back (sometimes called a perk).

Target markets

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

Personal

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Common personal loans aboard mortgage loans, car loans, home equity lines of credit, credit cards, installment loans, and payday loans. The credit earn of the borrower is a major component in and underwriting and lifeless rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment conditions, but overall interest paid increases as well.[5] A personal loan can be organized from banks, alternative (non-bank) lenders, online loan providers and confidential lenders.

Commercial

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Loans to businesses are inequity to the above but also include commercial mortgages and corporate bonds and government guaranteed loans Underwriting is not based upon credit earn but rather credit rating.

Loan payment

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The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time.[6]

The fixed monthly payment P for a loan of L for n months and a monthly lifeless rate c is:





P
=
L




c

(
1
+
c

)

n




(
1
+
c

)

n



1





{displaystyle P=Lcdot {frac {c,(1+c)^{n}}{(1+c)^{n}-1}}}



For more demand, see monthly amortized loan or mortgage payments.

Abuses in lending

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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 location that one can gain advantage over them; subprime mortgage-lending[7] and payday-lending[8] are two examples, where the moneylender is not authorized or regulated, the lender could be studied a loan shark.

Usury is a different form of abuse, where the lender charges excessive interest. In different time languages and cultures, the acceptable interest rate has varied, from no lifeless at all to unlimited interest rates. Credit card affairs in some countries have been accused by consumer sequences of lending at usurious interest rates and making cash out of frivolous “extra charges”.[9]

Abuses can also take keep in the form of the customer defrauding the lender by borrowing minus intending to repay the loan.

United Messes taxes

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Most of the basic laws governing how loans are handled for tax purposes in the Married States are codified by both Congress (the Internal Revenue Code) and the Treasury Responsibility (Treasury Regulations – another set of rules that interpret the Internal Revenue Code).[10]: 111 

1. A loan is not disagreeable income to the borrower.[10]: 111  Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.[10]: 111 [11]

2. The lender may not deduct (from own disagreeable income) the amount of the loan.[10]: 111  The rationale here is that one asset (the cash) has been converted into a different asset (a securities of repayment).[10]: 111  Deductions are not typically available when an outlay serves to build a new or different asset.[10]: 111 

3. The amount paid to fill the loan obligation is not deductible (from own disagreeable income) by the borrower.[10]: 111 

4. Repayment of the loan is not disagreeable income to the lender.[10]: 111  In carry out, the promise of repayment is converted back to cash, with no accession to cash by the lender.[10]: 111 

5. involving paid to the lender is included in the lender’s disagreeable income.[10]: 111 [12] involving paid represents compensation for the use of the lender’s cash or property and thus represents profit or an accession to cash to the lender.[10]: 111  involving income can be attributed to lenders even if the lender doesn’t invoice a minimum amount of interest.[10]: 112 

6. involving paid to the lender may be deductible by the borrower.[10]: 111  In general, interest paid in connection with the borrower’s business agency is deductible, while interest paid on personal loans are not deductible.[10]: 111  The maximum exception here is interest paid on a home mortgage.[10]: 111 

Income from discharge of indebtedness

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Although a loan does not initiate out as income to the borrower, it becomes averages to the borrower if the borrower is discharged of indebtedness.[10]: 111 [13] Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists “Income from Discharge of Indebtedness” in Region 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.[14][15]

See also

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  • 0% finance
  • Annual percentage rate (a.k.a. Effective annual rate)
  • Auto loan
  • Bank, Fractional-reserve banking, Building society
  • Debt, Consumer debt, Debt consolidation, Government debt
  • Default (finance)
  • Finance, Personal finance, Settlement (finance)
  • Interest-only loan, Negative amortization, PIK loan
  • Legal financing
  • Leveraged loan
  • Loan agreement
  • Loan guarantee
  • Loan sale
  • Pay it forward
  • Payday loan
  • Refund Anticipation Loan
  • Sponsored repayment
  • Smart contract
  • Student loan
  • Syndicated loan
  • Title loan

US specific:

References

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  1. ^



    Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, ISBN 978-1-55520-134-0



  2. ^


    CCH Incorporated (April 2008). Federal Estate & Gift Taxes: Code & Regulations (Including Related Income Tax Provisions), As of March 2008. CCH. pp. 631–. ISBN 978-0-8080-1853-7.



  3. ^



    Subsidized Loan – Definition and Overview at Aboutcom. Retrieved 2011-12-21.


  4. ^



    Concessional Loans, Glossary of Statistical Terms, oecd.org, Retrieved on 5/5/2013


  5. ^



    “Average new-car loan a report 65 months in fourth quarter”. Reuters. August 6, 2017. Retrieved 2017-08-06.




  6. ^


    Guttentag, Jack (October 6, 2007). “The Math Behind Your Home Loan”. The Washington Post. Retrieved May 11, 2010.



  7. ^



    “Predators try to retract home”. money.cnn.com. [CNN]. 18 Apr 2000. Retrieved 7 Mar 2018.




  8. ^


    Horsley, Scott; Arnold, Chris (2 Jun 2016). “New Rules To Ban Payday Lending ‘Debt Traps’“. National Public Radio. Retrieved 7 Mar 2018.



  9. ^



    “Credit cardholders pay Rs 6,000 cr ‘extra’“. The Financial Express (India). Chennai, India]. 3 May 2007. Archived from the current on January 20, 2019.


    Alt URL
  10. ^ abcdefghijklmnop
    Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007).


  11. ^



    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 unfastened dominion).


  12. ^


    26 U.S.C. 61(a)(4)(2007).


  13. ^


    26 U.S.C. 61(a)(12)(2007).


  14. ^


    26 U.S.C. 108(2007).


  15. ^


    EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 Banks Need Long-Term Rainy Day Funds

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