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{{Short description|Lending of money}}
{{Other uses}}
[[File:Petrevene_18.jpg|thumb|250px|right|Loan document issued by the Bank of [[Petrevene]], [[Bulgaria]], dated 1936.]]
{{Finance sidebar}}
{{Banking |terms}}

In [[finance]], a '''loan''' is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a [[debt]] and is usually required to pay [[interest]] for the use of the money.

The document evidencing the debt (e.g., a [[promissory note]]) will normally specify, 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 period of time, between the [[lender]] and the [[borrower]].

The interest 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 covenant]]s. 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 activities of [[financial institution]]s such as banks and credit card companies. For other institutions, issuing of debt contracts such as [[bond (finance)|bonds]] is a typical source of funding.

==Personal loan==

===Secured===
{{See also|Loan guarantee}}

A [[secured loan]] is a form of debt in which the borrower [[Pledge (law)|pledges]] some asset (i.e., a car, a house) as [[Collateral (finance)|collateral]].

A [[mortgage loan]] is a very common type of loan, used by many individuals to purchase residential or commercial property. The lender, usually a financial institution, is given security{{snd}} a [[lien]] on the title to the property{{snd}} until the mortgage is paid off in full. In the case of home loans, if the borrower [[Default (finance)|defaults]] on the loan, the bank would have the legal right to repossess the house and sell it, to recover 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{{snd}} 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 money 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 forms 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 securities 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 lower than those of unsecured loans. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate the quality of pledged collateral before sanctioning the loan.

===Unsecured===
[[Unsecured debt|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:
* [[Credit card]]s
* [[Unsecured debt|Personal loans]]
* [[Bank]] [[overdraft]]s
* Credit facilities or lines of credit
* [[Corporate bond]]s (may be secured or unsecured)
* [[Peer-to-peer lending]]

The [[interest rate]]s 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]].

Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of [[Default (finance)|default]] are severely limited, 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 pursue 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 court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

===Demand===
Demand loans are short-term loans<ref name=Signoriello1991>{{Cite book
| title = Commercial Loan Practices and Operations
| year = 1991
| author = Signoriello, Vincent J.
| isbn = 978-1-55520-134-0
}}</ref> that typically do not have fixed dates for repayment. Instead, demand loans carry a [[floating interest rate]], which varies according to the [[prime rate|prime lending rate]] or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time.<ref name="IncorporatedEditors2008">{{cite book|author1=CCH Incorporated|title=Federal Estate & Gift Taxes: Code & Regulations (Including Related Income Tax Provisions), As of March 2008|url=https://books.google.com/books?id=JJxcMf_zcDEC&pg=PA631|date=April 2008|publisher=CCH|isbn=978-0-8080-1853-7|pages=631–|access-date=2020-11-18|archive-date=2021-04-14|archive-url=https://web.archive.org/web/20210414031440/https://books.google.com/books?id=JJxcMf_zcDEC&pg=PA631|url-status=live}}</ref> Demand loans may be unsecured or secured.

===Subsidized{{anchor|Subsidized loan}}===
A subsidized loan is a loan on which the interest is reduced by an explicit or hidden [[subsidy]]. In the context of college loans in the [[United States]], it refers to a loan on which no interest is accrued while a student remains enrolled in education.

===Concessional===
A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or a combination of both.<ref>[http://stats.oecd.org/glossary/detail.asp?ID=5901 Concessional Loans, Glossary of Statistical Terms] {{Webarchive|url=https://web.archive.org/web/20131031211300/http://stats.oecd.org/glossary/detail.asp?ID=5901 |date=2013-10-31 }}, [[Organisation for Economic Co-operation and Development|oecd.org]], Retrieved on 5/5/2013</ref> Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an [[Employee benefits|employee benefit]] (sometimes called a ''perk'').

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

===Personal===
{{See also|Credit (finance)#Consumer credit}}

Common personal loans include [[mortgage loan]]s, car loans, home equity lines of credit, [[credit card]]s, [[installment loan]]s, and [[payday lending|payday loans]]. The [[credit score]] of the borrower is a major component in and underwriting and interest rates ([[Annual percentage rate|APR]]) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well.<ref>{{Cite news|url=https://www.reuters.com/article/us-auto-loans-idUSBRE9240KQ20130305|title=Average new-car loan a record 65 months in fourth quarter|date=August 6, 2017|work=Reuters|access-date=2017-08-06|archive-date=2017-08-06|archive-url=https://web.archive.org/web/20170806181709/http://www.reuters.com/article/us-auto-loans-idUSBRE9240KQ20130305|url-status=live}}</ref> A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders.

===Commercial===
{{Main|Business loan}}
Loans to businesses are similar to the above but also include [[commercial mortgage]]s and [[corporate bond]]s and government guaranteed loans Underwriting is not based upon credit score but rather [[credit rating]].

==Loan payment==
The most typical loan payment type is the fully [[Amortizing loan|amortizing]] payment in which each monthly rate has the same value over time.<ref>{{cite news | url=https://www.washingtonpost.com/wp-dyn/content/article/2007/10/05/AR2007100501165.html | newspaper=The Washington Post | title=The Math Behind Your Home Loan | first=Jack | last=Guttentag | date=October 6, 2007 | access-date=May 11, 2010 | archive-date=November 10, 2012 | archive-url=https://web.archive.org/web/20121110190731/http://www.washingtonpost.com/wp-dyn/content/article/2007/10/05/AR2007100501165.html | url-status=live }}</ref>

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

:<math>P = L \cdot \frac{c\,(1 + c)^n}{(1 + c)^n - 1}</math>

For more information, see [[Compound interest#Monthly amortized loan or mortgage payments|monthly amortized loan or mortgage payments]].

==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 them; subprime mortgage-lending<ref>{{cite web |url=https://money.cnn.com/2000/04/18/home_auto/q_lend/ |title=Predators try to steal home |author= |date=18 Apr 2000 |website=money.cnn.com |publisher=[CNN] |access-date=7 Mar 2018 |archive-date=8 March 2018 |archive-url=https://web.archive.org/web/20180308041705/http://money.cnn.com/2000/04/18/home_auto/q_lend/ |url-status=live }}</ref> and payday-lending<ref>{{cite news |last1=Horsley |first1=Scott |last2=Arnold |first2=Chris |date=2 Jun 2016 |title=New Rules To Ban Payday Lending 'Debt Traps' |url=https://www.npr.org/sections/thetwo-way/2016/06/02/480329986/new-rules-to-ban-payday-lending-debt-traps |work=[[National Public Radio]] |access-date=7 Mar 2018 |archive-date=8 March 2018 |archive-url=https://web.archive.org/web/20180308042507/https://www.npr.org/sections/thetwo-way/2016/06/02/480329986/new-rules-to-ban-payday-lending-debt-traps |url-status=live }}</ref> are two examples, where the moneylender is not authorized or [[Financial regulation|regulated]], the lender 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 as in the [[biblical]] prescript,<ref>{{bibleverse||Exodus|22:25}}</ref> to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges".<ref>{{cite news|date=3 May 2007|url-status=dead|url=http://www.financialexpress.com/latest_full_story.php?content_id=163028|title=Credit cardholders pay Rs 6,000 cr 'extra'|archive-url=https://web.archive.org/web/20190120183520/https://www.financialexpress.com/|archive-date=January 20, 2019|work=The Financial Express (India)|author=|location=Chennai, India]}} [https://cornerstonesupport.com/usury-example/ Alt URL] {{Webarchive|url=https://web.archive.org/web/20190120093655/https://cornerstonesupport.com/usury-example/ |date=2019-01-20 }}</ref>

Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay the loan.

==United States taxes==
Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations{{snd}} another set of rules that interpret the Internal Revenue Code).<ref name="donaldson">Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007).</ref>{{rp|111}}

# A loan is not gross income to the borrower.<ref name="donaldson" />{{rp|111}} Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.<ref name="donaldson" />{{rp|111}}<ref>''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).</ref>
# The lender may not deduct (from own gross income) the amount of the loan.<ref name="donaldson" />{{rp|111}} The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).<ref name="donaldson" />{{rp|111}} Deductions are not typically available when an outlay serves to create a new or different asset.<ref name="donaldson" />{{rp|111}}
# The amount paid to satisfy the loan obligation is not deductible (from own gross income) by the borrower.<ref name="donaldson" />{{rp|111}}
# Repayment of the loan is not gross income to the lender.<ref name="donaldson" />{{rp|111}} In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.<ref name="donaldson" />{{rp|111}}
# Interest paid to the lender is included in the lender's gross income.<ref name="donaldson" />{{rp|111}}<ref>26 U.S.C. 61(a)(4)(2007).</ref> 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.<ref name="donaldson" />{{rp|111}} Interest income can be attributed to lenders even if the lender does not charge a minimum amount of interest.<ref name="donaldson" />{{rp|112}}
# Interest paid to the lender may be deductible by the borrower.<ref name="donaldson" />{{rp|111}} In general, interest paid in connection with the borrower's business activity is deductible, while interest paid on personal loans are not deductible.<ref name="donaldson" />{{rp|111}} The major exception here is interest paid on a home mortgage.<ref name="donaldson" />{{rp|111}}

===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.<ref name="donaldson" />{{rp|111}}<ref>26 U.S.C. 61(a)(12)(2007).</ref> 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 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 income]]) of the [[Internal Revenue Code]].<ref>26 U.S.C. 108(2007).</ref><ref>EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 [https://www.wsj.com/articles/SB10001424127887324556304578120721147710286 Banks Need Long-Term Rainy Day Funds] {{Webarchive|url=https://web.archive.org/web/20170710025011/https://www.wsj.com/articles/SB10001424127887324556304578120721147710286 |date=2017-07-10 }}</ref>

==See also==
{{columns-list|colwidth=35em|
* [[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]]
*[[Loans and interest in Judaism]]
* [[Pay it forward]]
* [[Payday loan]]
* [[Refund Anticipation Loan]]
* [[Sponsored repayment]]
* [[Smart contract]]
* [[Student loan]]
* [[Syndicated loan]]
* [[Title loan]]
}}

'''US specific:'''
{{columns-list|colwidth=35em|
* [[FAFSA]]
* [[Federal student loan consolidation]]
* [[Federal Perkins Loan]]
* [[George D. Sax]] and the Exchange National Bank of Chicago - Innovation of instant loans
* [[Stafford loan]]
* [[Student loan default]]
}}

==References==
{{Reflist}}

{{Debt}}
{{Authority control}}

[[Category:Loans]]
[[Category:Banking terms]]
[[Category:Notary]]

Loan - Revision history

KirkEvd85074933: edit

Ajay Kumar: Created a new article