Lenders and Loans

borrowing money

A lender is an individual, a public or private group, or a financial institution that makes funds available to another with the expectation that the funds will be repaid. Repayment will include the payment of any interest or fees. Repayment may occur in increments (as in monthly mortgage payment) or as a lump sum.

Lenders may provide funds for a variety of reasons, such as a mortgage, automobile loan or small business loan. The terms of the loan specify how the loan is to be satisfied, the period of the loan, and the consequences of default. One of the largest loans consumers take out are home mortgages.

Loan Qualification Factors

Qualifying for a loan depends largely on the borrower’s credit history. The lender examines the borrower’s credit report, which details the names of other lenders extending credit, what types of credit are extended, the borrower’s repayment history and more. The report helps the lender determine whether the borrower is comfortable managing payments based on current employment and income.

The lender may also evaluate the borrower’s debt-to-income (DTI) ratio comparing current and new debt to before-tax income to determine the borrower’s ability to pay. Lenders may also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report to determine creditworthiness and help make a lending decision.

When applying for a secured loan, such as an auto loan or a home equity line of credit, the borrower pledges collateral. An evaluation will be made of the collateral’s value, and the existing debt secured by the collateral is subtracted from its value. The remaining equity affects the lending decision.

The lender evaluates a borrower’s available capital. Capital includes savings, investments and other assets which could be used to repay the loan if household income is insufficient. This is helpful in case of a job loss or other financial challenge. The lender may ask what the borrower plans to do with the loan, such as use it to purchase a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.

Small Business Lenders

Banks, savings and loans, and credit unions may offer Small Business Administration (SBA) programs and must adhere to SBA loan guidelines. Private institutions, angel investors, and venture capitalists lend money based on their own criteria. These lenders will also look at the nature of the business, the character of the business owner and the projected annual sales and growth for the business.

Small business owners prove their ability for loan repayment by providing lenders both personal and business balance sheets. The balance sheets detail assets, liabilities and the net worth of the business and the individual. Although business owners may propose a repayment plan, the lender has the final say on the terms.

Acting as a provider of loans is one of the principal tasks for financial institutions such as banks and credit card companies. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

Loans

A loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount.

The terms of a loan are agreed to by each party in the transaction before any money or property changes hands. If the lender requires collateral, that is outlined in the loan documents. Most loans also have provisions regarding the maximum amount of interest, as well as other covenants such as the length of time before repayment is required. A common loan for American consumers is a mortgage.

In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt provided by an organization or individual to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of 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.

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.

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