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Encyclopedia > Loan

A loan is a type of debt. All material things can be lent; this article, however, focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. Image File history File links Question_book-3. ... Look up loan in Wiktionary, the free dictionary. ... For other uses, see Debt (disambiguation). ... This article is about the business definition. ...


The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan. For other uses, see Money (disambiguation). ... For other senses of this word, see interest (disambiguation). ... For other uses, see Debt (disambiguation). ... A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or forbids the borrower from undertaking certain actions, or possibly restricts certain activities to circumstances when other conditions are met. ...


Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply. In financial economics, a financial institution acts as an agent that provides financial services for its clients. ... For other uses, see Debt (disambiguation). ... For alternative meanings, see bond (a disambiguation page). ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ...


Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money.

Contents

Types of loans

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. A secured loan is a loan in which the borrower pledges some asset (e. ... Collateral within a financial context is used to indicate assets that secure a debt obligation. ...


A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. 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. A mortgage loan is a loan secured by real property through the use of a mortgage (a legal instrument). ... Houses in Fishpool Street, St Albans, England For other meanings of the word house, see House (disambiguation). ... In law, lien is the broadest term for any sort of charge or encumbrance against an item of property that secures the payment of a debt or performance of some other obligation. ... In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e. ...


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.


A type of loan especially used in limited partnership agreements is the recourse note. A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). ... A recourse note is a debt note held by a lender that entitles the lender to seek financial recourse upon the default of the borrower. ...


A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk.[citation needed] In finance, securities lending or stock lending refers to the lending of securities by one party to another. ... It has been suggested that this article or section be merged into Hedge (finance). ...


Unsecured

Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages: Unsecured loans are loans that are not guaranteed with any asset, so that the risk of repossession does not exist. ...

The interest rates applicable to these different forms may vary depending on the lender, 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. Look up credit card in Wiktionary, the free dictionary. ... For other uses, see Bank (disambiguation). ... I warn you, Sir! The discourtesy of this bank is beyond all limits. ... A corporate bond is a bond issued by a corporation. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... The Consumer Credit Act 1974 is a consumer protection law in the UK. It requires certain businesses to obtain Consumer credit licences and protects individuals receiving credit up to £25,000. ...


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. Where the moneylender is not authorised, it could be considered a loan shark. Predatory lending is a pejorative term used to describe practices of some lenders. ... A loan shark is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. ...


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 interest rates. Credit card companies in some countries have been accused by consumer organisations of lending at usurious interest rates and making money out of frivolous "extra charges" [1] Look up usury in Wiktionary, the free dictionary. ...


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 lender.


United States taxes

Most of the basic rules governing how loans are handled for tax purposes in the United States are uncodified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations – another set of rules that interpret the Internal Revenue Code).[2] Yet such rules are universally accepted.[3]


1. A loan is not gross income to the borrower.[4] Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.[5]


2. The lender may not deduct the amount of the loan.[6] The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).[7] Deductions are not typically available when an outlay serves to create a new or different asset.[8]


3. The amount paid to satisfy the loan obligation is not deductible by the borrower.[9]


4. Repayment of the loan is not gross income to the lender.[10] In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.[11]


5. Interest paid to the lender is included in the lender’s gross income.[12] 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.[13] Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest.[14]


6. Interest paid to the lender may be deductible by the borrower.[15] In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible.[16] The major exception here is interest paid on a home mortgage.[17]


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. [18] 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 Section 62(a)(12) as a source of gross income. The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... Gross income is commonly defined as the amount of a companys or a persons income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. ...


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 should be 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.[19] The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...


See also

Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades. ... For other uses, see Debt (disambiguation). ... Consumer debt is consumer credit which is outstanding. ... Debt consolidation entails taking out one loan to pay off many others. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Government debt (also known as public debt or national debt) is... For other uses, see Bank (disambiguation). ... Fractional-reserve banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments. ... A building society is a financial institution, owned by its members, that offers banking and other financial services, especially mortgage lending. ... Annual Percentage Rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. ... In relation to the US: The Effective Annual Rate (EAR) is the interest rate that is annualized using compound interest, as opposed to using simple interest in the case of the Annual percentage rate (APR). ... In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e. ... An interest-only loan is a loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance unchanged. ... The Free Application for Federal Student Aid (known as FAFSA), is a form that can be filled out annually by current and anticipating university students (both undergraduate and graduate) and sometimes their parents in the United States to determine their eligibility for federal student financial aid (including grants, loans, and... In the United States both the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDLP) include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. ... A Federal Perkins Loan, or Perkins Loan, is a need-based student loan offered by the U.S. Department of Education to assist American college students in funding their post-secondary education. ... George D. Sax (1904-1974) was the chairman of the board at Chicagos former Exchange National Bank (now part of LaSalle Bank) and an entrepreneur who owned the Saxony Hotel, the first completely air-conditioned hotel to be built in Miami Beach. ... A shop window in Falls Church, Virginia advertises payday loans. ... A (Tax) Refund Anticipation Loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund. ... A Stafford Loan is a student loan offered to students enrolled in American institutions of higher education to help finance their education. ... Student loans are loans offered to students to assist in payment of the costs of professional education. ... A syndicated loan (or syndicated bank facility) is a large loan in which a group of banks work together to provide funds for a borrower. ... A car title loan or simply a title loan is a high interest loan where the borrower uses their automobile as collateral for the loan. ...

References

  1. ^ Credit card holders pay Rs 6,000 cr 'extra' May 03, 2007
  2. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. 111 (2007).
  3. ^ Id.
  4. ^ Id.
  5. ^ Id. 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).
  6. ^ Donaldson, at 111.
  7. ^ Id.
  8. ^ Id.
  9. ^ Id.
  10. ^ Id.
  11. ^ Id.
  12. ^ Id.; 26 U.S.C. 61(a)(4)(2007).
  13. ^ Id.
  14. ^ Id. at 112.
  15. ^ Id.
  16. ^ Id.
  17. ^ Id.
  18. ^ Id.; 26 U.S.C. 61(a)(12)(2007).
  19. ^ Id.; 26 U.S.C. 108(2007).
May 3 is the 123rd day of the year in the Gregorian calendar (124th in leap years). ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st century. ...

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