loan

(noun)

A sum of money or other valuables or consideration that an individual, group, or other legal entity borrows from another individual, group, or legal entity (the latter often being a financial institution) with the condition that it be returned or repaid at a later date (sometimes with interest).

Related Terms

Examples of loan in the following topics:

  • Secured vs. Unsecured Funding

    • A secured loan is a loan in which the borrower pledges an asset (e.g. a car or property) as collateral, while an unsecured loan is not secured by an asset.
    • A mortgage loan is a secured loan in which the collateral is real estate.
    • A loan is a monetary form of debt.
    • Unsecured loans are monetary loans that are not secured against the borrower's assets.
    • Unsecured loans are often more expensive and less flexible than secured loans, but suitable if the lender wants a short-term loan (one to five years).

  • Short-Term Loans

    • In return for the loans and guarantees, KKR was offering roughly 2 percent in fees.
    • A payday loan (also called a payday advance) is a small, short-term unsecured loan.
    • The basic loan process involves a lender providing a short-term unsecured loan to be repaid at the borrower's next pay day.
    • A bridge loan is a type of short-term loan, typically taken out for a period of two weeks to three years pending the arrangement of larger or longer-term financing.
    • Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan.

  • Long-Term Loans

    • A mortgage is a loan secured by real property.
    • It requires a mortgage note affirming the existence of the loan and the encumbrance of the realty through the granting of a mortgage securing the loan.
    • Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
    • Over this period, the principal component of the loan (the original loan) is slowly paid down through amortization.
    • Term: Mortgage loans generally have a maximum term, or a number of years after which an amortizing loan will be repaid.

  • A Bank Failure

    • If your bank sold the loans, the bank would sell the loans for a lower value than the bank's book value.
    • Your bank could ask the Federal Reserve for a loan, but the Fed may not grant the loan.
    • Banks spread their loans across different industries, different regions, and different loan borrowers.
    • If a factory bankrupts and defaults on its commercial loan, the loan default does not harm the bank severely because the bank is earning income on the other loans.
    • For example, a person applies for a home-improvement loan and plans to use the loan to speculate in the derivatives market.

  • Annuities

    • For example, a car loan may be an annuity: In order to get the car, you are given a loan to buy the car.
    • There is still an interest rate implicitly charged in the loan.
    • The sum of all the payments will be greater than the loan amount, just as with a regular loan, but the payment schedule is spread out over time.
    • Suppose you are the bank that makes the car loan.
    • There are three advantages to making the loan an annuity.

  • Savings and Loan Associations (S&Ls)

    • A savings and loan association is a special kind of deposit institution that only participates in a subsection of financial activities.
    • A savings and loan association (or S&L), also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans.
    • S&Ls accepted savings deposits and used the money to make loans to home buyers.
    • Most of the loans went to people who did not make enough money to be welcomed at traditional banks.
    • Define a savings and loan association, and its role in the American banking system

  • Government Financial Institutions

    • Federal, state, and local governments in the United States create government financial institutions that lend funds to the public.First, The U.S. government uses direct financing, when it creates a public corporation that sells bonds and commercial paper to investors in the financial markets.Then the public company uses the investors' money to lend to borrowers directly.For example, the Farm Credit System, a U.S. government agency, lends to farmers.Farmers use these loans to finance growing crops, equipment, or mortgage loans.Second, the U.S. government lends money to students who pursue a college education.For example, the Student Loan Market Association, known as Sallie Mae, lends directly to students or buys student loans from banks.Finally, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) grant mortgages to low-income households.They also buy and sell mortgages to boost the liquidity of the mortgage loan market.For the second method, a government can lend to the public through loan guarantees, which is similar to insurance.For example, a bank lends to a student to pay for an education, and the U.S.
    • Department of Education guarantees the loan.If the student defaults, subsequently, the U.S.
    • Department of Education repays the loan to the bank, and then the U.S. government uses its authority to collect from the student.
    • Some people question a government's role in financing.When a government directly lends, the government squeezes the financial institutions out of the loan market.Furthermore, the federal government loan guarantees increase the problem of moral hazard.Financial institutions receiving the loan guarantees might not screen borrowers as much, lending to borrowers with a high default risk.For example, the effects of the 2007 Great Recession continue to linger in the U.S. economy, even in 2014.Recession caused mass layoffs and doubled the unemployment rate.Then the housing values continue to plummet while foreclosures continue soaring.Consequently, the U.S. government might be liable for trillions of dollars in loan guarantees and bailout of public corporations.We explain several examples below:
    • Department of Education, SallieMae, and commercial banks granted college student loans that had surpassed $1 trillion in 2012.Unfortunately, college graduates continue to enter an abysmal job market in 2013.Student-loan default rate hovers around 24%.College students, on average, owe approximately $24,000 while law school graduates accumulate loans exceeding a $100,000.Unfortunately, a stagnant economy would force the U.S. government to pay billions in loan guarantees.

  • Depository Institutions

    • Depository institutions accept deposits and make loans.
    • Many borrowers seek bank loans for mortgages, car loans, or credit cards.
    • Second, the banks gather information about their borrowers, lowering the risk of loan default.
    • For example, if you borrowed $10,000 at a 5%, interest rate and loaned it out at 10%, then you earn a profit.
    • Originally, credit unions offered savings deposits and made consumer loans forcars and boats.

  • Discount Policy

    • The Fed can grant loans to financial institutions.
    • A loan from the Fed is a privilege, and not a right.
    • If a bank needs a loan from the Fed, and the bank did not do what the Fed wanted, then the Fed could refuse to loan to the bank.
    • However, the Fed cannot force banks to accept its loans.
    • These loans mean banks are experiencing financial problems, and the Fed could harm them by taking the loans away.

  • Non-Bank Financial Institutions

    • You have probably seen ads for check-cashing stores, payday loans, and rent-to-own stores.
    • Consider your options to taking a high-cost loan and use loans wisely.
    • Many check-cashing stores also make payday loans.
    • A payday loan is a small, high-interest, short-term cash loan.
    • You run the risk of getting into a payday loan cycle of debt by taking out loan after loan