In business terms, a loan is a financial obligation of a borrower to another person, organization, or entities for the purpose of purchasing an asset that the first party promises to pay back. The loan is typically used to finance the purchase of raw materials, inventory, plant and equipment, and development expenses. The loan is returned to the lender after the assets have been purchased and they either pay the outstanding debt, take possession of the asset, or resell it. In finance, a loan essentially is the lending of currency by one or more people, companies, or organizations to others, typically for the purpose of acquiring debt and to repay the debt over a period of time.
In general terms, there are two ways in which a borrower may borrow: through a personal loan (which is drawn against the borrower’s personal assets) or through a promissory note. A personal loan can be used to finance a variety of purposes including home improvements, vacations, debt consolidation, and personal acquisitions. On the other hand, a promissory note is drawn against a borrower’s personal assets and promises to pay back a certain amount of money on a specified date. For instance, a promissory note may be used to obtain money for college tuition and housing when a borrower is unable to continue paying for those costs due to economic conditions. A mortgage is often used to finance the purchase of a home.
Business finance refers to the management of resources by businesses to acquire new capital to expand their operations or to acquire a new customer. Business finance includes internal revenue code, tariffs and licensing payments, tariffs on international commerce, and insider trade secrets among others. These are collected and processed by the Internal Revenue Service either at the local level or in Washington, D.C. It then becomes part of the federal tax return along with the gross income and corporation tax. Many entrepreneurs find this taxing complex, so many set up business credit cards to collect the interest they pay on loans and credit card payments when it is due.
Interest only loans are one type of unsecured loan because the borrower pays only the interest and does not pay off the entire principal balance until the loan amount has been paid off. This type of loan allows the borrower to choose to borrow more money over time and repay only the interest. Paying off the entire loan in full provides the borrower with instant relief from mounting interest costs, but it requires the borrower to have a steady source of income or a large enough bankroll to cover the interest payments on the loan. With interest only loans, borrowers who consistently make their monthly payments will avoid paying additional interest and will eventually pay down the principal faster than the loan can be repaid. To learn more about interest only loan programs, contact your financial institution, consumer credit counseling service, or a bankruptcy attorney.
Another type of unsecured loan is an installment contract where the lender pays the borrower directly. Installment contract loans are popular for those who are able to borrow large sums of money and need a quick repayment plan. The installment contract features terms that allow borrowers to borrow amounts up to a pre-set amount and repay the loan at designated intervals within a specified time frame. These types of personal loans often feature attractive repayment plans that allow borrowers to spread their payments out over a number of months.
Some borrowers prefer to take out a secured loan because they fear that they might default on their obligation to the lender. A secured loan requires collateral – such as real estate – in order to secure the loan. If the borrower defaults, the lender can sell the collateral to recoup its losses.