In economics, a loan is a lending of funds by one or more persons, companies, institutions or other entities to another persons, companies, institutions etc. The recipient is liable to repay the loan amount as well as to make interest on that loan until it is paid off and to settle the original principal amount borrowed. In short, we can say that loan is an asset. Since it is an asset, in the market of today, one can buy and sell this asset and gain profit.
There are many factors that determine the market value of a particular asset such as its price and its yield. These factors also affect the loan market. A lender decides the interest rate of a loan simply by considering the risk involved. If the amount of loan is low, the lender will charge high interest rate. However, if the amount of loan is high, the lender can charge a low interest rate to attract a maximum number of borrowers.
The basic concept of the loan market is to link the value of a collateral to the price of the loan. In simple words, a loan can be defined as a financial asset when a borrower transfers a certain quantity of his assets (which includes his principal and interest) to another person, company or financial institution. This person, company or financial institution pays interest on the principal and takes a certain net amount of principal as repayment from the borrower. This process goes on continually between two or more persons or institutions.
Loan can be of many forms such as commercial finance, residential finance, education finance, consumer finance etc. Commercial finance is mainly used for large businesses. In this type of loan, the loan amount is used by the businessman to purchase raw materials/equipment and to make payrolls. The loan amount can be used for short term to meet immediate needs of the business. This loan is mainly secured against real estate or any other valuable property.
Residential finance refers to a small business’s loan taken for the purpose of constructing houses. It is usually required for the payment of interest and principal balance. Small businesses generally borrow money to start up a new facility. Since these loans are very short term, the lender charges low interest rates. But the repayment term is very short. To obtain a mortgage or a home loan, you need to satisfy the eligibility criteria.
There are many companies which provide non-recourse and demand loans. Non-recourse type of lending means that you can claim the whole amount if your loan defaults. On the other hand, demand loans means that the lender assesses your capacity to repay the loan based on current market conditions.
