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A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over 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. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. 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 lent.

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.

Contents

Types of loans

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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 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.

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 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.

A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre-settlement loan. This is considered a secured non-recourse debt due to the fact if the case reaches a verdict in favor of the defendant the loan is forgiven.

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:

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.

Demand

Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.[1]

Loan payment

The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value overtime. [2]

The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is: [3]

P = L \cdot \frac{c\,(1 + c)^n}{(1 + c)^n - 1}

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 authorized, they 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 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". [4]

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).[5] Yet such rules are universally accepted.[6]

1. A loan is not gross income to the borrower.[7] Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.[8]

2. The lender may not deduct the amount of the loan.[9] The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).[10] Deductions are not typically available when an outlay serves to create a new or different asset.[11]

3. The amount paid to satisfy the loan obligation is not deductible by the borrower.[12]

4. Repayment of the loan is not gross income to the lender.[13] In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.[14]

5. Interest paid to the lender is included in the lender’s gross income.[15] 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.[16] Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest.[17]

6. Interest paid to the lender may be deductible by the borrower.[18] In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible.[19] The major exception here is interest paid on a home mortgage.[20]

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. [21] 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.

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.[22]

See also

References

  1. ^ "Getting Started in Small Business". Canadian Bankers Association. http://www.cba.ca/en/viewpub.asp?fl=3&sl=89&tl=90&docid=40&pg=8.  
  2. ^ http://www.washingtonpost.com/wp-dyn/content/article/2007/10/05/AR2007100501165.html
  3. ^ http://www.mtgprofessor.com/formulas.htm
  4. ^ Credit card holders pay Rs 6,000 cr 'extra' May 3, 2007
  5. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. 111 (2007).
  6. ^ Id.
  7. ^ Id.
  8. ^ 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).
  9. ^ Donaldson, at 111.
  10. ^ Id.
  11. ^ Id.
  12. ^ Id.
  13. ^ Id.
  14. ^ Id.
  15. ^ Id.; 26 U.S.C. 61(a)(4)(2007).
  16. ^ Id.
  17. ^ Id. at 112.
  18. ^ Id.
  19. ^ Id.
  20. ^ Id.
  21. ^ Id.; 26 U.S.C. 61(a)(12)(2007).
  22. ^ Id.; 26 U.S.C. 108(2007).

In finance, a Borrower is the party in a loan agreement which receives money or other instrument from a lender and promises to repay the lender in a specified time.


Bible wiki

Up to date as of January 23, 2010

From BibleWiki


One who receives, at his own request, the property of another, for free use, upon the agreement that it shall be returned to the owner (Ḳid. 47b). He is distinguished from the borrower of money, the "loweh" ( (missing hebrew text) ), in that the latter need not return the property which he has received, but may return it in kind.

Biblical Law.

The Biblical law concerning the liability of the borrower (Ex 22:13, 14; R. V., 14, 15) holds such person to the strictest accountability for the property borrowed. Inasmuch as it is given him at his request for use without pay, the law requires of him not merely the ordinary care that must be given to property in the hands of a bailee, but it holds him absolutely responsible for its return to the owner; and if it is lost by him or stolen from him, or if it consist in cattle which die while in his possession, he is not permitted to offer any defense to the claim of the owner, but must make absolute restitution.

The Biblical law cites one exception to this general rule; namely, if the owner accompanies the property into the possession of the borrower, the latter is not obliged to make restitution. Thus the Mishnah says, "If one borrows a cow and borrows or hires the owner with her, or if he borrows or hires the owner, and then borrows the cow and the latter dies, he is not liable; but if he borrows the cow, afterward either borrowing or hiring the owner, and the cow dies, he is liable" (Mishnah B. M. viii.). In the former case the decision is based on the fact that the owner is with her at the time that she goes into the borrower's possession; in the latter case the owner is not with her at such time.

Talmudic Exceptions.

The Talmudic law established several other exceptions, based upon a proper interpretation of the Biblical text. Inasmuch as the property was borrowed to be used, the borrower ought not to be held responsible for any depreciation in value, or for any damages which result to the property, from the legitimate use for which it was borrowed. Rab therefore decided that the borrower of the cow was not responsible for what in modern law would be called "reasonable wear and tear," or, as the Talmudic phrase more tersely expresses it, (missing hebrew text) , "if she died from work." "Not only if she is wasted in flesh through labor, is he not liable, but if she dies from the labor, he is not liable, for the borrower may say, 'I did not borrow her to seat her on a chair'" (B. M. 96b); and in a case where a man borrowed an ax which was broken while in use, Rab decided that if the borrower could prove that he did not put it to any extraordinary use, he was not liable (B. M. ib.).

Other exceptions whereby the borrower is released from making restitution are the following: If he borrows the article for a specific time, he is not liable for a casualty after the time has expired (B. M. 81a), although ordinarily he is responsible for the article until it has actually been returned to the owner (Mishnah B. M. viii. 3). If he borrows an article and at the same time the other borrows an article from him, his responsibility is changed to that of a bailee for hire (B. M. 81b). Finally, he may make a special agreement with the owner of the article, releasing himself from liability (Mishnah B. M. vii. 10). Unless a specific time has been fixed between the borrower and the owner, the borrower must return the article as soon as he has ceased to use it (Maimonides, "Yad," She'elah, i. 5; Ḥoshen Mishpaṭ, 341, 1); and he has no right to loan the borrowed article to another (ib. 342, 1).

Beginning and Extent of Liability.

The rights and liabilities of the borrower begin, first, when the object is actually taken into his possession by "drawing" it toward him, according to R. Eleazar: "As they decreed 'drawing' for purchaser, so also they decreed 'drawing' for bailees"; and, second, when he has begun to use it. R. Huna said, "If one borrows an ax and splits wood with it, he has acquired it, and, if he does not split, he does not acquire it" (B. M. 99a). The liability of the borrower is limited only to the value of the injured property (B. M. 94b); hence when a man borrowed an ax and through carelessness broke it, R. Kahana and R. Assi decided that he must return the pieces to the owner after they have been valued, paying an additional sum sufficient to cover the full value of the ax as he received it (B. M. 97a).

As the borrower is one of the four classes of bailees mentioned in Ex 20:7-15, the subject will be further elucidated by reference to articles Bailment, Hiring and Letting. For borrower of money see Loans and Usury. For borrower giving pledge see Pledge and Mortgage.

Bibliography: Yad, She'elah, ch. i.-iii.; Ḥoshen Mishpaṭ, ch. cccxl.-cccxlvii.

This entry includes text from the Jewish Encyclopedia, 1906.

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