Student loan default

Defaulting on a student loan can have a number of negative consequences. To understand loan default, it is helpful to have a few common terms defined:
Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.
Loan Delinquency is a failure to make loan payments when they are due. Extended delinquency can result in loan default.
Loan Default is the failure to repay a loan according to the terms agreed to in the promissory note. A lender may take legal action to get the money back.

Consequences

Defaulting on a loan can adversely affect credit for many years. Default occurs when a loan receives no payment for 270 days. The loan leaves repayment status and is due in-full when the lender requests. New collection costs are added to the loan’s balance, and the loan becomes drastically more expensive than before. There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.

Garnishment of Wages and Tax Refund

In addition, the IRS can take the borrower’s income tax refund until the defaulted loan is paid in full. This is a popular way of collecting on loan debt, and the Department of Education collects hundreds of millions of dollars this way.

To object, a written statement must be presented within 65 days of the IRS’ notice, and must give evidence of the following:

• The loan has been repaid.
• Payments have been made under a negotiated repayment agreement, or a cancellation, deferment or forbearance has been granted.
• The borrower has filed for bankruptcy.
• The borrower is totally and permanently disabled.
• The loan in question is not the borrower’s loan.
• The borrower dropped out of school and the school owes a refund.
• The borrower attended a trade school and the school closed.
• The school falsely certified the borrower as being eligible for a loan.

The government can also garnish wages as a way to recover money owed on a defaulted student loan. The United States Department of Education or a Student Loan Guarantor can garnish 15% of a defaulted borrower’s wages. The loan holder does not have to sue the borrower first. The borrower can object to the garnishment, but only under very specific circumstances, such as if his or her weekly income is less than 30 times the federal minimum wage.

Defaulting on student loans can also end in a lawsuit. The government and private lenders can sue in order to collect on loans. There is no time limit on suing to collect student loans, and the borrower can be sued indefinitely.

Getting Out of Default

There are rehabilitation programs designed to help borrowers get out of debt. Rehabilitation is a federally mandated program that gives federal student loan borrowers a way to bring their loans out of default. Rehabilitation can reverse the many negative consequences of defaulting on a student loan, and participation is a right granted to a federal education loan borrower.

In the rehabilitation program, a borrower must do a number of things. He or she must make at least 9 qualifying, on-time student loan payments. If any payments are missed, the borrower must begin the repayment schedule from the beginning. After borrowers complete the agreement, the guarantor transfers the loan to a lender and servicer. The loan is then considered out of default and back into repayment.

Rehabilitation Benefits

After completing loan rehabilitation, borrowers once again become eligible to receive financial aid. With the loan no longer in default, wage garnishment and the seizure of tax refunds ceases. Borrowers are able to apply for deferment and forbearance benefits as long as these have not been exhausted during default. And last, the entire outstanding balance of the loan is no longer due in full.

Federal student loan consolidation

In the United States both the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDLP) include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.

Interest rates and payments

Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.

History

The Federal Loan Consolidation Program was created in 1986. In 1998, the United States Congress changed the interest rate to the aforementioned fixed rate weighted mean, effective February 1, 1999. Consolidation loans taken out before that date had a variable interest rate, determined by the individual FDLP loan origination center (e.g., in the case of a university, that university) or FFELP lender (e.g., a third party bank).

In 2005, the Government Accountability Office considered consolidating consolidation loans so that they were exclusively managed through the FDLP. Based on several assumptions about future variations in interest rates, the loan volume, the percentage of defaulters, cost estimates from the United States Department of Education, it concluded that while doing so would incur an additional cost of $46 million, caused by the higher administrative costs of the FDLP compared to the FFELP, this would be offset by a $3,100 million saving comprised in part of avoiding $2,500 million in subsidy costs. In 2008, turmoil in the financial and credit markets has led to the suspension of many loan consolidation programs, including Sallie Mae, Nelnet and Next Student.

Stafford Loan

A Stafford Loan is a student loan offered to eligible students enrolled in accredited American institutions of higher education to help finance their education. The terms of the loans are described in Title IV of the Higher Education Act of 1965 (with subsequent amendments), which guarantees repayment to the lender if a student defaults.

In 1988, Congress renamed the Federal Guaranteed Student Loan program the Robert T. Stafford Student Loan program, in honor of U.S. SenatorRobert Stafford, a Republican from Vermont, for his work on higher education.^[1]

Because the loans are guaranteed by the full faith of the US Government, they are offered at a lower interest rate than the borrower would otherwise be able to get for a private loan. On the other hand, there are strict eligibility requirements and borrowing limits on Stafford loans.

Students applying for a Stafford loan or other federal financial aid must first complete a FAFSA. Stafford loans are available to students either directly from the United States Department of Education through the Federal Direct Student Loan Program (FDSLP, also known as Direct) or from a financial intermediary (such as Chase, Sallie Mae or Student Loan Corp.) through the Federal Family Education Loan Program (FFELP).

No payments are expected on the loan while the student is enrolled as a full or half time student. This is referred to as in-school deferment. Deferment of repayment continues for six months after the student leaves school either by graduating, dropping below half-time enrollment, or withdrawing. This is referred to as the Grace Period.

Stafford loans are available both as subsidized and unsubsidized loans. Subsidized loans are offered to students based on demonstrated financial need. The interest on Subsidized loans is paid by the federal government while the student is in school, during the grace period, and during authorized deferment. For unsubsidized Stafford loans, students are responsible for all of the interest that accrues while the student is enrolled in school. The interest may be deferred throughout enrollment. Unpaid interest that is deferred until after graduation is capitalized (added to the loan principal).

Interest on Stafford loans may vary and are determined based upon the date the loan was disbursed.

Calculations to determine undergraduate Stafford loan rates

Stafford Loan Disbursement Date	Rate Type	Subsidized Interest Rate	Unsubsidized Interest Rate	Current Rate (2009-2010)
Prior to July 1, 1998	Variable	91-Day T-Bill + 3.1%	91-Day T-Bill + 3.1%	3.28%
July 1, 1998 to June 30, 2006	Variable	91-Day T-Bill + 2.3%	91-Day T-Bill + 2.3%	2.48%
July 1, 2006 to June 30, 2008	Fixed	6.8%	6.8%	6.8%
July 1, 2008 to June 30, 2009	Fixed	6.0%	6.8%	6.8%
July 1, 2009 to June 30, 2010	Fixed	5.6%	6.8%	6.8%
July 1, 2010 to June 30, 2011	Fixed	4.5%	6.8%	6.8%
July 1, 2011 to June 30, 2012	Fixed	3.4%	6.8%	6.8%
July 1, 2012 to June 30, 2013	Fixed	6.8%	6.8%	6.8%

Refund anticipation loan

A refund anticipation loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds than waiting for their tax refund.

United States

In the United States, taxpayers often apply for a refund anticipation loan through a paid professional tax preparation service, where a fee is typically charged for the preparation of the tax return. In the United States the Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. An additional fee is usually charged by the service for originating a bank product. By law this fee must be the same on both loan and non-loan bank products, and in 2004 the average fee was $32.^[1] The bank through which the loan is made charges interest or finance charges.

According to the National Consumer Law Center, 12 million taxpayers used an RAL in 2004.^[2] With e-filing and IRS partnerships that help consumers e-file for free, U.S. taxpayers can receive their tax refunds within three weeks and as quickly as ten to fourteen days if choose to receive their refund via direct-deposit. This has rendered RALs less attractive to some.^[3]

1. ^ "Building a Better Refund Anticipation Check". Consumer Law. http://www.consumerlaw.org/initiatives/refund_anticipation/content/BuildingBetterRAC.pdf. Retrieved on 2008-10-16.
2. ^ "E-filing can make high-fee loans unnecessary - Tax Tactics". MSNBC.com. http://msnbc.msn.com/id/11362964/.
3. ^ "Cheaper and still fast alternatives to refund anticipation loans". http://www.bankrate.com/brm/itax/news/20010131b.asp.

Payday loan

A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card (see cash advance). LegislationUSA, between different states. regarding payday loans varies widely between different countries and, within the

Some jurisdictions impose strict usury limits, limiting the nominal annual percentage rate (APR) that any lender, including payday lenders, can charge; some outlaw payday lending entirely; and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.15²⁶ − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.

Loan Sale

A loan sale is a sale, often by a bank, under contract of all or part of the cash stream from a specific loan, thereby removing the loan from the bank's balance sheet.

Often subprime loans from failed banks are sold by the FDIC in an online auction format through companies such as The Debt Exchange.

لون کیا ہے؟(What is Loan? in Urdu)

Title Loan

A car title loan, or simply title loan, is a loan where the borrower provides their car title as collateral for a loan.

These loans are typically short-term, and tend to carry higher interest rates than other sources of credit. These loans have higher interest rates than other sources of credit due to the fact that the lender typically does not check credit and that the only consideration for the loan is the value and condition of the vehicle.

Most title loans can be acquired in 15 minutes or less on loan amounts as little as $100. Most other financial institutions will not loan under $1000 to someone without any credit as they deem these not profitable and too risky. In addition to verifying the borrower's collateral, many lenders verify that the borrower is employed or has some other source of regular income. The lenders do not generally consider the borrower's credit score. The loan is secured by the title to the vehicle.

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Process of Title Loan

The maximum amount of the loan is determined by the collateral. Typical lenders will offer up to 50% of the car's resale value, though some will go higher. The borrower must hold clear title to the car; this means that the car must be paid in full with no liens or current financing.

Depending on the state where the lender is located, interest rates typically range from 36% to as high as 651.79% (APR). Payment schedules vary but at the very least the borrower has to pay the interest due at each due date. At the end of the term of the loan, the full outstanding amount may be due in a single payment. If the borrower is unable to repay the loan at this time, then they can roll the balance over, and take out a new title loan. Government regulation often limits the total number of times that a borrower can roll the loan over, so that they do not remain perpetually in debt.

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Regulation of Title Loan

There has been new regulation that will take in effect on April 1 2009, for title loans in Illinois.

• A $4,000 limit on car title loans.
• Restrictions on loans of any amount that would result in monthly payments exceeding 50 percent of the consumers' gross monthly income.
• It will be prohibited for lenders to give loans with balloon payments, thus allowing consumers to repay the loan in equal installments - much like traditional car loans.
• Car title loans can be refinanced, but only if the principal on the loan has been paid down by at least 20 percent.
• Illinois title loans that are refinanced cannot exceed the total outstanding on the original loan.
• The state of Illinois will create a statewide database of current title loans. This is an effort to enforce the above regulations.
• Title loan companies operating in Illinois will be enforced to provide consumers with pamphlets from the Illinois Department of Financial and Professional Regulation outlining options for debt management as well as debtors' rights and responsibilities.

California existing regulations.

• Above $2,500 the rate cap is exempt. Essentially, it's what the lender and borrower agree on.
• Customer must show ability to pay.
• Fully amortized loans.
• Maximum $75 loan processing fee for loans up to $5000, no maximum for loans above.

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Loan Market Overview

The “retail” market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors. Before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit. After this market read, the arrangers will launch the deal at a spread and fee that it thinks will clear the market. Until 1998, this would have been it. Once the pricing was set, it was set, except in the most extreme cases. If the loans were undersubscribed, the arrangers could very well be left above their desired hold level. Since the Russian debt crisis roiled the market in 1998, however, arrangers have adopted market-flex language, which allows them to change the pricing of the loan based on investor demand--in some cases within a predetermined range--as well as shift amounts between various tranches of a loan, as a standard feature of loan commitment letters. As a result of market flex, loan syndication functions as a “book-building” exercise, in bond-market parlance. A loan is originally launched to market at a target spread or, as was increasingly common by 2008 with a range of spreads referred to as price talk (i.e., a target spread of, say, LIBOR+250 to LIBOR+275). Investors then will make commitments that in many cases are tiered by the spread. For example, an account may put in for $25 million at LIBOR+275 or $15 million at LIBOR+250. At the end of the process, the arranger will total up the commitments and then make a call on where to price the paper. Following the example above, if the paper is vastly oversubscribed at LIBOR+250, the arranger may slice the spread further. Conversely, if it is undersubscribed even at LIBOR+275, then the arranger will be forced to raise the spread to bring more money to the table.

Loan Market Participants

There are three primary-investor consistencies: banks, finance companies, and institutional investors. Banks, in this case, can be either a commercial bank, a savings and loan institution, or a securities firm that usually provides investment-grade loans. These are typically large revolving credits that back commercial paper or are used for general corporate purposes or, in some cases, acquisitions. For leveraged loans, banks typically provide unfunded revolving credits, LOCs, and--although they are becoming increasingly less common--amortizing term loans, under a syndicated loan agreement. Finance companies have consistently represented less than 10% of the leveraged loan market, and tend to play in smaller deals--$25 million to $200 million. These investors often seek asset-based loans that carry wide spreads and that often feature time-intensive collateral monitoring.

Institutional investors in the loan market are principally structured vehicles known as collateralized loan obligations (CLO) and loan participation mutual funds (known as “prime funds” because they were originally pitched to investors as a money-market-like fund that would approximate the prime rate). In addition, hedge funds, high-yield bond funds, pension funds, insurance companies, and other proprietary investors do participate opportunistically in loans. Typically, however, they invest principally in wide-margin loans (referred to by some players as “high-octane” loans), with spreads of LIBOR+500 or higher. During the first half of 2008, these players accounted for roughly a quarter of overall investment. CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. The special-purpose vehicle is financed with several tranches of debt (typically a ‘AAA’ rated tranche, a ‘AA’ tranche, a ‘BBB’ tranche, and a mezzanine tranche) that have rights to the collateral and payment stream in descending order. In addition, there is an equity tranche, but the equity tranche is usually not rated. CLOs are created as arbitrage vehicles that generate equity returns through leverage, by issuing debt 10 to 11 times their equity contribution. There are also market-value CLOs that are less leveraged--typically 3 to 5 times--and allow managers more flexibility than more tightly structured arbitrage deals. CLOs are usually rated by two of the three major ratings agencies and impose a series of covenant tests on collateral managers, including minimum rating, industry diversification, and maximum default basket. By 2007, CLOs had become the dominant form of institutional investment in the leveraged loan market, taking a commanding 60% of primary activity by institutional investors. But when the structured finance market cratered in late 2007, CLO issuance tumbled and by mid-2008, CLO’s share had fallen to 40%.

Retail investors can access the loan market through prime funds. Prime funds were first introduced in the late 1980s. Most of the original prime funds were continuously offered funds with quarterly tender periods. Managers then rolled true closed-end, exchange-traded funds in the early 1990s. It was not until the early 2000s that fund complexes introduced open-ended funds that were redeemable each day. While quarterly redemption funds and closed-end funds remained the standard because the secondary loan market does not offer the rich liquidity that is supportive of open-end funds, the open-end funds had sufficiently raised their profile that by mid-2008 they accounted for 15% to 20% of the loan assets held by mutual funds.

Credit Facilities

Syndicated loans facilities(Credit Facilities) also known as type of loans are basically short\long term financial assistance programs which is designed to help financial institutions and other institutional investors to draw notional amount as per the requirement. In general there are four main types of syndicated loan facilities: a revolving credit, a term loan; an LOC; an acquisition or equipment line (a delayed-draw term loan).

The Syndication Process

Before awarding a mandate, an issuer might solicit bids from arrangers. The banks will outline their syndication strategy and qualifications, as well as their view on the way the loan will price in market. Once the mandate is awarded, the syndication process starts. The arranger will prepare an information memo (IM) describing the terms of the transactions. The IM typically will include an executive summary, investment considerations, a list of terms and conditions, an industry overview, and a financial model. Because loans are unregistered securities, this will be a confidential offering made only to qualified banks and accredited investors. If the issuer is speculative grade and seeking capital from nonbank investors, the arranger will often prepare a “public” version of the IM. This version will be stripped of all confidential material such as management financial projections so that it can be viewed by accounts that operate on the public side of the wall or that want to preserve their ability to buy bonds or stock or other public securities of the particular issuer (see the Public Versus Private section below). Naturally, investors that view materially nonpublic information of a company are disqualified from buying the company’s public securities for some period of time. As the IM (or “bank book,” in traditional market lingo) is being prepared, the syndicate desk will solicit informal feedback from potential investors on what their appetite for the deal will be and at what price they are willing to invest. Once this intelligence has been gathered, the agent will formally market the deal to potential investors. The executive summary will include a description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials. Investment considerations will be, basically, management’s sales “pitch” for the deal. The list of terms and conditions will be a preliminary term sheet describing the pricing, structure, collateral, covenants, and other terms of the credit (covenants are usually negotiated in detail after the arranger receives investor feedback).

The industry overview will be a description of the company’s industry and competitive position relative to its industry peers.

The financial model will be a detailed model of the issuer’s historical, pro forma, and projected financials including management’s high, low, and base case for the issuer. Most new acquisition-related loans are kicked off at a bank meeting at which potential lenders hear management and the sponsor group (if there is one) describe what the terms of the loan are and what transaction it backs. Management will provide its vision for the transaction and, most important, tell why and how the lenders will be repaid on or ahead of schedule. In addition, investors will be briefed regarding the multiple exit strategies, including second ways out via asset sales. (If it is a small deal or a refinancing instead of a formal meeting, there may be a series of calls or one-on-one meetings with potential investors.) Once the loan is closed, the final terms are then documented in detailed credit and security agreements. Subsequently, liens are perfected and collateral is attached. Loans, by their nature, are flexible documents that can be revised and amended from time to time. These amendments require different levels of approval. Amendments can range from something as simple as a covenant waiver to something as complex as a change in the collateral package or allowing the issuer to stretch out its payments or make an acquisition.

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Types of Syndications

There are three types of syndications: an underwritten deal, “best-efforts” syndication, and a “club deal.”

Underwritten deal

An underwritten deal is one for which the arrangers guarantee the entire commitment, then syndicate the loan. If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credit’s fundamentals, improve. If not, the arranger may be forced to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit.

Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flex-language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

Best-efforts syndication

A “best-efforts” syndication is one for which the arranger group commits to underwrite less than the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close--or may need major surgery to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.

Club deal

A “club deal” is a smaller loan (usually $25 million to $100 million, but as high as $150 million) that is premarketed to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

Syndicated loan

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial or investment banks known as arrangers.

Starting with the large leveraged buyout loans of the mid-1980s, the syndicated loan market has become the dominant way for issuers to tap banks and other institutional capital providers for loans.

At the most basic level, arrangers serve the investment-banking role of raising investor dollars for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowers--issuers whose credit ratings are speculative grade and who are paying spreads (premiums above LIBOR or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions.

Loan guarantee

A loan guarantee is a promise by a government to assume a private debt obligation if the borrower defaults. Most loan guarantee programs are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers.^[1]

Loan guarantees can also be extended to large borrowers for political reasons. For example, Chrysler Corporation, one of the "big three" US automobile manufacturers, obtained a loan guarantee in 1979 amid lobbying by labor interests.

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Student loans

Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry a lower interest rate than other loans and are usually issued by the government. Often they are supplemented by student grants which do not have to be repaid.

Personal financial planning

A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
2. Setting goals: Two examples are "retire at age 65 with a personal net worth of $200,000" and "buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one's employment income, or investing in the stock market.
4. Execution: Execution of one's personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.

Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs for children, medical expenses, and estate planning.^{[citation needed]}

Finance

Finance is the science of funds management.^[1] The general areas of finance are business finance, personal finance, and public finance.^[2] Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.

Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt sold directly to investors from corporations, while that investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly-traded corporations.^{[dubious – discuss]}

Central banks act as lenders of last resort and control the money supply, which affects the interest rates charged. As money supply increases, interest rates decrease.^[3]

1. ^ Gove, P. et al. 1961. Finance. Webster's Third New International Dictionary of the English Language Unabridged. Springfield, Massachusetts: G. & C. Merriam Company.
2. ^ finance. (2009). In Encyclopædia Britannica. Retrieved June 23, 2009, from Encyclopædia Britannica Online: http://www.britannica.com/EBchecked/topic/207147/finance
3. ^ Microsoft. 2009. Finance. uk.encarta.msn.com, http://www.webcitation.org/5hlUjB4mc

Types of loans

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.^{[citation needed]}

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.^{[citation needed]} 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:

• credit card debt
• personal loans
• bank overdrafts
• credit facilities or lines of credit
• corporate bonds

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.

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 authorised, it 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". ^[1]

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).^[2] Yet such rules are universally accepted.^[3]

1. A loan is not gross income to the borrower.^[4] Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.^[5]

2. The lender may not deduct the amount of the loan.^[6] The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).^[7] Deductions are not typically available when an outlay serves to create a new or different asset.^[8]

3. The amount paid to satisfy the loan obligation is not deductible by the borrower.^[9]

4. Repayment of the loan is not gross income to the lender.^[10] In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.^[11]

5. Interest paid to the lender is included in the lender’s gross income.^[12] 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.^[13] Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest.^[14]

6. Interest paid to the lender may be deductible by the borrower.^[15] In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible.^[16] The major exception here is interest paid on a home mortgage.^[17]

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. ^[18] 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.^[19]

1. ^ Credit card holders pay Rs 6,000 cr 'extra' May 03, 2007
2. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. 111 (2007).
3. ^ Id.
4. ^ Id.
5. ^ 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).
6. ^ Donaldson, at 111.
7. ^ Id.
8. ^ Id.
9. ^ Id.
10. ^ Id.
11. ^ Id.
12. ^ Id.; 26 U.S.C. 61(a)(4)(2007).
13. ^ Id.
14. ^ Id. at 112.
15. ^ Id.
16. ^ Id.
17. ^ Id.
18. ^ Id.; 26 U.S.C. 61(a)(12)(2007).
19. ^ Id.; 26 U.S.C. 108(2007).

What is Loan

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.