The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount.
Most loans are secured by assets, in the form of real property, personal property, stocks, bonds, insurance policies, or other financial instruments. The parties who loan money to one another agree to either make the loan interest-free or to pay back the principal amount at a specified point in time.
Loan Originators
The first step in the origination process is to obtain collateral, i.e., assets to pledge as collateral to the lender. In many cases, borrowers sell assets to an intermediary or a third party. Other times, the borrowers either borrow or obtain advances from commercial banks or other financial institutions. The commercial banks extend the credit, thus transforming a bank loan into a loan.
A loan is also a product or service of exchange. When something is sold, the seller receives money for the item. For example, if you lend someone money and you’re willing to collect it after you’ve collected interest for a certain period of time, the loan is a money-for-money trade. To the lender, the money that’s returned to him in the form of repayment is a commodity, or the collateral of the loan. If a borrower defaults on a loan, he may be able to have the loan instrument
The Loan Process
Here's how the loan process works. First, a borrower identifies someone who can make a loan in exchange for the borrower's collateral. The borrower applies for a loan. A loan officer or a business associate of the borrower researches the borrower and makes an underwriting decision based on the loan's structure, the borrower's business, existing or recent loans made to the borrower's competitors, and so on. The loan officer calculates how much the borrower can borrow and estimates the amount of cash the borrower would be required to repay based on the borrower's income and personal credit. If the borrower passes the underwriting test, a loan is then prepared and sent to a lender. The lender receives the loan and evaluates its risk. The borrower's property is considered collateral for the loan and the borrower's business as well. The lender determines whether the borrower has the capacity to repay the loan and whether the borrower is likely to incur any of the following default risks.
Components of a Loan
There are several important terms that determine the size of a loan and how quickly the borrower can pay it back:
Loan Amount: How much money is required to repay the loan.
Principal: How much of the loan amount is borrowed and how much of it remains to be repaid.
Interest: How much of the principal amount remains to be repaid.
Payment: How much of the principal amount is to be repaid, after the amount already borrowed has been repaid.
Default: How likely the loan is to be lost and the amount of money that may be lost.
Financing: How much money will be available to pay back the loan. Amounts that a borrower can obtain for a loan are also important and a borrower's ability to obtain certain amounts depends on several factors:
Competitive Opportunity: What is available in the market for the borrower to borrow.
Business Experience: The borrower's experience and expertise in managing the business and financial condition of the borrower and his or her competitors.
Credit: A borrower's credit score.
Tips on Getting a Student Loan
In order to qualify for a loan, prospective borrowers need to show that they have the ability and financial discipline to repay the lender. There are several factors that lenders consider when deciding if a particular borrower is worth the risk:
Debt to Income Ratio (DTI): This is a calculation that shows how much income is available in a month in order to repay the amount borrowed. The lower the DTI ratio, the better.
Your sources of income: Credit and payment history are two main factors that determine your DTI ratio. If a borrower has a history of delinquencies on credit cards or personal loans or if they have few or no assets, they will not be able to get a loan of more than 30% of their monthly income.
Assets: If a borrower has assets like cars, boats, and other assets with cash value, he may be able to borrow money for more than 60% of their monthly income.
Borrower's history of payments: How many times a borrower has failed to make his or her payments. Lenders check a borrower's history of debt to see if it is likely to increase the DTI ratio.
Consumer credit report: the consumer credit report is a summary of consumer credit such as credit cards and mortgages. a high score indicates a higher dti ratio, while a low score indicates that a borrower is likely to experience a more rapid increase in DTI.
Personal credit report: This is a financial report prepared for the borrower that includes information about any past defaults on loans, bankruptcies, etc.
When you apply for a loan, your lender will ask for additional information such as financial information, collateral, and other assets. Many lenders also have detailed requirements for borrowers, especially for those who have little or no collateral. Since a loan is a debt, a borrower must have enough assets or income to make the loan payment. An additional consideration in some loan agreements is that borrowers will generally be required to retain an attorney to represent them
Types of Student loan:
There are many different types of loans. The most common are secured loans. Secured loans are loans that are backed by collateral. The collateral is usually a piece of property, such as a house or car.There are many types of loans in the United States: auto loans, home loans, business loans, and others. They all work differently and have different requirements. For this reason, it is important to understand all the types of loans available before making a decision. In this paper we will focus on auto loans.
Benefits of student Loan
A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. Student loans are different than other types of loans, such as auto loans or home mortgages, because they cannot be discharged through bankruptcy. Federal student loans also have more flexible repayment options, such as income-based repayment plans and deferments. Private student loans generally have higher interest rates and less flexibility with repayment, although there are some options available to ease the burden of repayment.
A study loan is a financial aid program that provides funding for tertiary education. There are many types of loan programs, each with its own benefits and drawbacks. Some loans are need-based, while others are merit-based. There are also loans that are available to specific groups of people, such as minorities or veterans.
