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
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1 Types of loans o 1.1 Secured o 1.2 Unsecured o 1.3 Demand o 1.4 Subsidized 2 Target markets o 2.1 Personal or commercial 3 Loan payment 4 Abuses in lending 5 United States taxes 6 Income from discharge of indebtedness 7 See also 8 References

[edit] Types of loans

[edit] Secured
See also: Loan guarantee A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral.

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.

[edit] 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:

credit card debt personal loans bank overdrafts credit facilities or lines of credit corporate bonds (may be secured or unsecured)

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. 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 are severely limited. 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.

[edit] Demand
Demand loans are short term loans (typically no more than 180 days)[1] 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.

[edit] Subsidized

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.[2] Otherwise, it may refer to a loan on which an artificially low rate of interest (or none at all) is charged to the borrower. An unsubsidized loan is a loan that gains interest at a market rate from the date of disbursement.

[edit] Target markets

[edit] Personal or commercial
See also: Credit_(finance)#Consumer_credit Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a business. Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans and payday loans. The credit score of the borrower is a major component in and underwriting and interest rates (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. For car loans in the U.S., the average term was about 60 months in 2009.[3] Loans to businesses are similar to the above, but also include commercial mortgages and corporate bonds. Underwriting is not based upon credit score but rather credit rating.

The other day a friend of mine asked me about different loan types, as she was on her way to the bank to consolidate some high-interest credit card debt. I was surprised at the seemingly elementary questions she was asking she is an intelligent well-established gal who is pretty good with numbers (the credit card debt is another story). It made me realize that maybe she is not alone. Although you may know what the various debt vehicles and loan types are, do you know all their inherent characteristics? If youre not sure, here is a loan primer to refresh your knowledge.

Secured vs. Unsecured

All loans, no matter what they are, are either secured or unsecured.

Secured Loans
These are secured (or borrowed) against an asset you own, such as your home, which is offered up as collateral. Ultimately if you default on the loan, the bank will get their money back by way of foreclosing your house (or otherwise seizing the collateral). The interest rate should be very low (and often negotiable), hovering close to prime rate. The better your credit rating is, the more bargaining power you have with the terms, including loan amount and repayment period. Payment terms are flexible, and can even be structured as interest-only. If the loan is secured against the equity in your home, the application process usually involves a drive by appraisal of your home and some legal fees, that together amount to a few hundred (up to a thousand) dollars. As such, its usually best to apply for a higher loan qualification amount than you think you need (as long as you know yourself well enough not to get into more debt unnecessarily). This way if you wish to borrow more money later on, new appraisals and legal fees can be avoided. Examples of secured loans:

Car loans Boat (and other recreational vehicle) loans Mortgages Home equity loans Home equity lines of credit

Unsecured Loans
These are (as they sound) not secured against any assets. The bank can only utilize collectors (and freeze your accounts) if you default.

The loan amount granted is largely attributable to your credit history and income/assets/debts at the time of application. There is a considerably higher assumption of risk on the banks part with an unsecured loan. Thus, the interest rate is much higher. Examples of Unsecured Loans:

Personal loans Personal lines of credit Student loans Credit cards/department store cards

There are many different types of loans you can take out. When youre looking to borrow money, its important that you know your options.

Open-Ended and Closed-Ended Loans

Open-ended loans are loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Each time you make a purchase, your available credit decreases. As you make payments, your available increases allowing you to use the same credit over and over. Closed-ended loans cannot be borrowed once theyve been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you dont have any available credit you can use on closed-ended loans. Instead, if you need to borrow more money, youd have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans, and student loans.

Secured and Unsecured Loans

Secured loans are loans that rely on an asset as collateral for the loan. In the event of loan default, the lender can take possession of the asset and use it to cover the loan. Interests rates for secured loans may be lower than those for unsecured loans. The asset may need to be appraised before you can borrow a secured loan. Unsecured loans dont have asset for collateral. These loans may be more difficult to get and have higher interest rates. Unsecured loans rely solely on your credit history and your income to

qualify you for the loan. If you default on an unsecured loan, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan.

Involving into business industry is a big risk but very promising. With the entrepreneur skills you have and choosing correct strategies, it can make you ten times richer from your original status. Business loan is one good option in aiding your finances on creating your own company. There are several forms of business loan to choose from to fit in your company requirements. You may choose from the following business terms: 1. Short Term This type of loan is payable within one year. It is intended for the business urgently needed of cash. The advantages of short term loan is to have lower interest rate and less time duration. These type have variety of functions such as loans, tax refund anticipation loans and financial aid short-term loans. Short term loans can be approved with 16 days. The loanable amount is based on your daily income where the duration of the loan is set to pay check. 2. Intermediate Term- Payment period is from one to three years. It covers large primary expenses. In the length of the loan, the business owners pay their lenders in monthly installment basis. Several intermediate term loans include balloon payment at the end of the given period of time, where the borrower must pay the remaining loaned amount in a large lump sum. 3. Long Term Payment duration is up to seven years. It is used to assist start up business on initial cost like furniture and commercial mortgages. It can be paid through monthly, quarterly, or yearly basis.

Definition of 'Classified Loan'

Any bank loan that is in danger of default. Classified loans have unpaid interest and principal outstanding, and it is unclear whether the bank will be able to recoup the loan proceeds from the borrower. Banks usually categorize such loans as adversely classified assets on their books.

Investopedia explains 'Classified Loan'

Classified loans have failed to meet acceptable credit standards according to bank examiners. The credit quality has essentially declined since initial approval was granted. This type of loan has a high rate of borrower default, and raises the cost of borrowing money for the other customers.

Read more: http://www.investopedia.com/terms/c/classified-loan.asp#ixzz1otw8E0Lw

Subsidized vs. unsubsidized loans If you are awarded a loan as part of your financial aid package, you may be eligible for either subsidized or unsubsidized funds, or a combination of both. The big difference between the two is when the interest begins to accrue.

Subsidized loans are awarded on the basis of financial need. You won't be charged any interest before you begin repaying the loan because the federal government subsidizes the interest during this time. Unsubsidized loans charge interest from the time the money is first disbursed until it is paid in full. The interest is capitalized, meaning that you pay interest on any interest that has already accrued. One way to minimize how much interest accrues is to pay the interest as it accumulates.

performing loan

Definition
Loan on which payments of interest and principal are less than 90 days past due.

Read more: http://www.businessdictionary.com/definition/performing-loan.html#ixzz1ou7wPXaw

Non-performing loan
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A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms. A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full (IMF) By Bank regulatory definition[citation needed] non-performing loans consist of:

other real estate owned which is that taken by foreclosure or a deed in lieu of foreclosure, loans that are 90 days or more past due and still accruing interest, and loans which have been placed on nonaccrual (i.e., loans for which interest is no longer accrued and posted to the income statement)