Loans
Anyone who has worked in a bank will know that loans are considered by the bank as its assets. This may seem strange to the lay person. How can giving out money that you may not actually be repaid be considered an asset? The answer is that by lending money, the bank generally secures itself with a return asset stream (loan repayments) that will have a higher asset value than the original loan. This is something for the loan borrower to bear in mind. They are borrowing funds and must actually repay more than they have initially borrowed.
Loans are normally financial assets, although any type of asset can effectively be loaned. There are two parties to any loan – the borrower and the lender. The borrower receives an amount of money and must pay back the lender according to a repayment schedule that may last anywhere from a number of days, to many years. The repayment schedule is determined according to the amount borrowed, the agreed rate of interest at which the loan is repaid and the length of time for which the loan is outstanding. The first of these three parameters will remain fixed, but the interest rate and repayment period are often open to negotiation throughout the life of the loan.
Loans can take many shapes and forms. Bank loans, for example, can last for a several days, such as bridging loans used when one must bridge the gap between two large financial obligations. Other loans can stretch out into the future such as house mortgage loans which can run out to 30 years and even longer.
There are two major categories of loan – secured and unsecured. Secured loans are those against which collateral is required. A typical secured loan is a house mortgage where the lending institution will require a claim against the purchased property to be set up in the event that the mortgage borrower defaults on their loan. Unsecured loans are normally for lesser amounts and include those associated with credit card usage, bank overdrafts and bank lines of credit.
Finally, a word on interest rates. Loans are inextricably linked to prevailing rates of interest. Anyone who is considering taking out any loan should immediately consult with their tax advisor who would guide them on loan timings and amounts in the light of the prevailing rates of interest rates of the day.
For more infomation on loans choose from the list below. |
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