LOANS

Contents
Chapter I –Introduction…………………………………………………3
Title……………………………………………………………………….3
Justification………………………………………………………………3
Chapterisation…………………………………………………………..4
Research Objectives……………………………………………………6
Hypothesis……………………………………………………………….6
Research Questions……………………………………………………6
Meaning…………………………………………………………………7
Data Collection Tools…………………………………………………7
Research Methodology……………………………………………….7
Chapter II – Features of Loan………………………………………..8
Security…………………………………………………………………8
Obligation………………………………………………………………8
Interest………………………………………………………………….9
Maturity…………………………………………………………………9
Restrictive Covenants…………………………………………………9
Convertibility……………………………………………………………9
Chapter III – Advantages and Disadvantages of Loans…………..9
From Point of View of the Borrower (Adv)………………………….10

Cheap…………………………………………………………………..10
Tax Benefit……………………………………………………………..10
Flexible…………………………………………………………………10
Control…………………………………………………………………10
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From Point of View of the Lender (Adv)……………………………10
Secured………………………………………………………………10
Regular Income………………………………………………………..11
Conversion……………………………………………………………..11
From Point of View of the Borrower (Disadv)………………………11
Obligation………………………………………………………………11
Risk…………………………………………………………………….11
Interference……………………………………………………………12
From Point of View of the Lender (Disadv)………………………..12
Negotiability……………………………………………………………12
Control…………………………………………………………………12
Chapter IV – Types of Loans………………………………………..12
Student Loans…………………………………………………………15
Mortgages……………………………………………………………..16
Auto Loans…………………………………………………………….17
Personal Loans……………………………………………………….17
Loans for Veterans……………………………………………………18
Small Business Loans……………………………………………….18
Payday Loans…………………………………………………………18
Borrowing from Retirement & Life Insurance………………………19
Consolidated Loans………………………………………………….19
Borrowing from Friends and Family………………………………...19
Cash Advances……………………………………………………….20
Home Equity Loans…………………………………………………..20
Chapter V – Conclusion………………………………………………21

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Chapter I – Introduction:

 1Title:

A loan is when you receive money from a friend,

bank or financial institution in exchange for future repayment
of the principal, plus interest. The principal is the amount you
borrowed, and the interest is the amount charged for
receiving the loan.

 Justification:
Loans are the lifeblood of a bank. All
businesses sell products, and a bank's product is money.
Banks make money by taking in funds from depositors and
other sources and then lending money out to customers. The
bank spread is the difference between what the interest a
bank must pay to obtain the funds and the rate the bank
charges on the loan. For example, a bank might pay two
percent interest to a depositor and charge a customer six
percent interest on a loan. The four percentage points is the
bank's spread, and its profit.
Everyone needs money at every stage of
their life. Sometimes it so happens that they have keen
desire to purchase their favorite stuff but they are incapable
to purchase due to shortage of money.

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CHAPTERISATION:

 Chapter I - Introduction

 Chapter II- Features of Loans

1. Security
2. Obligation
3. Interest
4. Maturity
5. Restrictive Covenants
6. Convertibility

 Chapter III – Advantages and Disadvantages of Loans

1. From Point of View of the Borrower (Adv)
 Cheap
 Tax Benefit
 Flexible
 Control
2. From Point of View of the Lender (Adv)
 Secured
 Regular Income
 Conversion
3. From Point of View of the Borrower (Disadv)
 Obligation
 Risk
 Interference
4. From Point of View of the Lender (Disadv)

 Negotiability
 Control
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 Chapter IV- Types of Loans

1. Student Loans

2. Mortgages
3. Auto Loans
4. Personal Loans
5. Loans for Veterans
6. Small Business Loans
7. Payday Loans

8. Borrowing from Retirement & Life Insurance

9. Consolidated Loans

10. Borrowing from Friends and Family

11. Cash Advances
12. Home Equity Loans

 Chapter V- Conclusion

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 Research Objectives:
To know and learn the importance of loans and
the role it plays in the world and the economy.

 Hypothesis:
The provision of different kinds of loans to
the public may result in increased rate of development in the
economy and also helps the people who are deprived of
money. With bank loans, you only need to worry about making
your regular installment payments on time. This is an
advantage over overdrafts, where you must pay the full amount
when the bank demands it. In addition, banks don't usually
monitor how you use your loan as long as you make your
payments on time, so you can invest it however you deem fit.

 Research Questions:
(i) What are the major benefits of the banks in the
business of providing loans to the public and
the private other than earning interest from the loans?
(ii) Does the loan principal affect business taxes.
(iii) Do we need to have a reserve study before we can get
a loan?

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  Meaning:
Loan is a source financed primarily by banks and financial
institutions. Such a type of loan is generally used for
financing of expansion, diversification and modernization of
projects—so this type of financing is also known as project
financing. Loans are repayable in periodic installments.

Data Collection Tools:

This study is based on secondary sources of data. Secondary

Sources involve generalisation, analysis, synthesis, interpretation,
or evaluation of the original information (Primary Sources).
Secondary sources were created by someone who did not
participate in the events or conditions. This research includes
journals, thesis, and books.

Research Methodology:

This paper is based upon Doctrinal Research Methodology.

Doctrinal Research is concerned with legal prepositions and
doctrines. The sources of data are legal and appellate court
decisions. Doctrinal research, also called traditional research, is
not concerned with people but with documents/ this research is
also an analytical, historical, critical and comparative study.

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Chapter II - Features of Loans2:
Loan is a part of debt financing obtained from banks and
financial institutions.

The basic features of loan have been discussed below::

1. Security:
Loans are secured. Assets which are financed through loans
serve as primary security and the other assets of the company
serve as collateral security.

2. Obligation:
Interest payment and repayment of principal on loans is
obligatory on the part of the borrower. Whether the firm is earning
a profit or not, loans are generally repayable over a period of 5
to 10 years in installments.

3. Interest:

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 Loans carry a fixed rate of interest but this rate is negotiated
between the borrowers and lenders at the time of dispersing of
loan.

4. Maturity:
As it is a source of financing, its maturity period lies between 5 to
10 years and repayment is made in installments.

5. Restrictive Covenants:
Besides asset security, the lender of the loans imposes other
restrictive covenants to themselves. Lenders ask the borrowers to
maintain a minimum asset base, not to raise additional loans or to
repay existing loans, etc.

6. Convertibility:
Loans may be converted into equity at the option and according
to the terms and conditions laid down by the financial institutions.

Chapter III – Advantages and Disadvantages of Loans:

Advantages of Loans:
Loans are one of the important sources of project financing.

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The advantages of loans are as follows;
i) From Point of View of the Borrower:
Cheap:
It is a cheaper source of financing.

Tax Benefit:
Interest payable on loan is a tax deductible expenditure and thus
taxation benefit is available on interest.

Flexible:
Loans are negotiable loans between the borrowers and lenders.
So terms and conditions of such type of loans are not rigid and
this provides some sort of flexibility.

Control:
Since term loans represent debt financing, the interest of the
equity shareholders are not diluted.

ii) From Point of View of the Lender:

Secured:
Term loans are provided by banks and other financial institutions
against security—so term loans are secured.

Regular Income:
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It is obligatory on the part of the borrower to pay the interest and
repayment of principal irrespective of its financial position—hence
the lender has a regular and steady income.

Conversion:
Financial institutions may insist the borrower to convert the term
loans into equity. Therefore, they can get the right to control the
affairs of the company.

Disadvantages of Loans:
Term loans have several disadvantages which are discussed
below.

i) From Point of View of the Borrower:

Obligation:
Yearly interest payment and repayment of principal is obligatory
on the part of borrower. Failure to meet these payments raises a
question on the liquidity position of the borrower and its existence
will be at stake.

Risk:
Like any other form of debt financing term loans also increases
the financial risk of the company. Debt financing is beneficial only
if the internal rate of return of the concern is greater than its cost
of capital; otherwise it adversely affects the benefit of
shareholders.

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Interference:
In addition to collateral security, restrictive covenants are also
imposed by the lenders which lead to unnecessary interference in
the functioning of the concern.

ii) From Point of View of the Lender:

Negotiability:
Terms and conditions of term loans are negotiable between
borrower and lenders and thus it sometimes can affect the
interest of lenders.

Control:
Like other sources of debt financing, the lenders of term loans do
not have any right to control the affairs of the company.

Chapter IV – Types of Loans3:

Types of Consumer Credit & Loans

Loan contracts come in all kinds of forms and with varied terms,
ranging from simple promissory notes between friends and family

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members to more complex loans like mortgage, auto, payday and
student loans.

Banks, credit unions and other people lend money for significant,
but necessary items like a car, student loan or home. Other loans,
like small business loans and those from the Department of
Veterans Affairs, are only available to select groups of people.

Regardless of type, every loan – and its conditions for repayment

– is governed by state and federal guidelines to protect
consumers from unsavory practices like excessive interest rates.
In addition, loan length and default terms should be clearly
detailed to avoid confusion or potential legal action.

In case of default, terms of collection of the outstanding debt

should clearly specify the costs involved in collecting upon the
debt. This also applies to parties of promissory notes as well.

If you are in need of money for an essential item or to help make

your life more manageable, it’s a good thing to familiarize yourself
with the kinds of credit and loans that might be available to you
and the sorts of terms you can expect.

Types of Credit: Open-End & Closed-End Credit Options

The two basic categories of consumer credit are open-end and

closed-end credit. Open-end credit, better known as revolving
credit, can be used repeatedly for purchases that will be paid
back monthly, though paying the full amount due every month is
not required. The most common form of revolving credit are credit
cards, but home equity loans and home equity lines of credit
(HELOC) also fall in this category.

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 Credit cards are used for daily expenses, such as food, clothing,
transportation and small home repairs. Interest charges are
applied when the monthly balance is not paid in full. The interest
rates on credit cards average 15 percent, but can be as low as
zero percent (temporary, introductory offers) and as high as 30
percent or more, depending on the consumer’s payment history
and credit score. Loans for bad creditmay be hard to find, but
lower interest rates are available within nonprofit debt
management programs, even for credit scores below 500.

Closed-end credit is used to finance a specific purpose for a

specific period of time. They also are called installment loans
because consumers are required to follow a regular payment
schedule (usually monthly) that includes interest charges, until the
principal is paid off.

The interest rate for installment loans varies by lender and is tied
closely to the consumer’s credit score. The lending institution can
seize the consumer’s property as compensation if the consumer
defaults on the loan.

Examples of closed-end credit include:

• Mortgages

• Car loans

• Appliance loans

• Payday loans

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Types of Loans :

Loan types vary because each loan has a specific intended use.
They can vary by length of time, by how interest rates are
calculated, by when payments are due and by a number of other
variables.

Student Loans4

Student loans are offered to college students and their families to

help cover the cost of higher education. There are two main
types: federal student loans and private student loans. Federally
funded loans are better, as they typically come with lower interest
rates and more borrower-friendly repayment terms.

Student Loan Facts

A college education is an important requirement for entry into
many of the highest earning professions and jobs. A college
graduate can expect to make about $1.3 million more than high
school graduates over the course of their working lives. How
much you borrow, at what terms, and how you manage
your student loan repayment can have a serious impact on
your budget, your credit score and your ability to take out a car or
mortgage loan in the future. If you or a family member are
struggling with student loans, or have questions about your
financial situation, speak with one of our skilled student
loan specialists.

Student Loan Misconceptions

There are nearly as many misconceptions about student loan
debt as there are ways to obtain and pay for it. Too often, college

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 students rely on peers for advice on rules on responsibilities. In
the process, a lot of half-truths or just plain misinformation is
passed along.

Some of the more popular misconceptions regarding student

loans include:

 It’s good debt. It is, if you get a diploma and job. The total amount
you take as a loan should not exceed your first-year salary.
 Loans automatically renew until I graduate. Loans typically are for
one school year. If you or your family’s financial situation
changes, your loan awards could, too.
 Federal and private loans are the same. There are many
differences, some of them enormous. Interest rates, loan
modification and forgiveness programs are examples.
 I can always just declare bankruptcy. Not to solve student loan
problems, you can’t. Only in extremely rare cases can federal and
private loans be forgiven by bankruptcy.

Mortgages

Mortgages are loans distributed by banks to allow consumers to

buy homes they can’t pay for upfront. A mortgage is tied to your
home, meaning you risk foreclosure if you fall behind on
payments. Mortgages have among the lowest interest rates of all
loans.

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Auto Loans5

Like mortgages, auto loans are tied to your property. They can
help you afford a vehicle, but you risk losing the car if you miss
payments. This type of loan may be distributed by a bank or by
the car dealership directly but you should understand that while
loans from the dealership may be more convenient, they often
carry higher interest rates and ultimately cost more overall.

Personal Loans6

What are Personal Loans?

Most personal loans lack collateral – property that can be taken if

the borrower defaults – so they rely on the integrity of the
borrower to repay the loan’s principal and interest. In many cases,
lenders do background and credit checks on potential borrowers
to assess their risk.

Personal loans used to be simple part of the American economy.

Homegrown savings and loans lent money to buy boats and
barbeque pits based on the reputation of their customers. If you
had a job, paid your bills on time and were known to be honest,
there was loan money available.

Personal lending has changed -- a lot. In today’s mass society,

giant national and regional banks rule and loan underwriting is
anything but personal.

Though banks still make open-ended loans to their best

customers, the review process can be difficult and the terms
might discourage all but the most determined customers. Today’s
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borrowers often turn to family members, friends and peer-to-peer
lenders for personal borrowing.

Personal loans can be used for any personal expenses and don’t
have a designated purpose. This makes them an attractive option
for people with outstanding debts, such as credit card debt, who
want to reduce their interest rates by transferring balances. Like
other loans, personal loan terms depend on your credit history.

Loans for Veterans

The Department of Veterans Affairs (VA) has lending programs

available to veterans and their families. With a VA-backed home
loan, money does not come directly from the administration.
Instead, the VA acts as a co-signer and effectively vouches for
you, helping you earn higher loan amounts with lower interest
rates.

Small Business Loans

Small business loans are granted to entrepreneurs and aspiring

entrepreneurs to help them start or expand a business. The best
source of small business loans is the U.S. Small Business
Administration (SBA), which offers a variety of options depending
on each business’s needs.

Payday Loans

Payday loans are short-term, high-interest loans designed to

bridge the gap from one paycheck to the next, used
predominantly by repeat borrowers living paycheck to paycheck.

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The government strongly discourages consumers from taking out
payday loans because of their high costs and interest rates.

Borrowing from Retirement & Life Insurance

Those with retirement funds or life insurance plans may be

eligible to borrow from their accounts. This option has the benefit
that you are borrowing from yourself, making repayment much
easier and less stressful. However, in some cases, failing to repay
such a loan can result in severe tax consequences.

Consolidated Loans

A consolidated loan is meant to simplify your finances. Simply put,

a consolidate loan pays off all or several of your outstanding
debts, particularly credit card debt. It means fewer monthly
payments and lower interest rates. Consolidated loans are
typically in the form of second mortgages or personal loans.

Borrowing from Friends and Family

Borrowing money from friends and relatives is an informal type of

loan. This isn’t always a good option, as it may strain a
relationship. To protect both parties, it’s a good idea to sign a
basic promissory note.

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Cash Advances

A cash advance is a short-term loan against your credit card.

Instead of using the credit card to make a purchase or pay for a
service, you bring it to a bank or ATM and receive cash to be
used for whatever purpose you need. Cash advances also are
available by writing a check to payday lenders.

Home Equity Loans7

If you have equity in your home – the house is worth more than
you owe on it – you can use that equity to help pay for big
projects. Home equity loans are good for renovating the house,
consolidating credit card debt, paying off student loans and many
other worthwhile projects.

Home equity loans and home equity lines of credit (HELOCs) use
the borrower’s home as a source of collateral so interest rates are
considerably lower than credit cards. The major difference
between the two is that a home equity loan has a fixed interest
rate and regular monthly payments are expected, while a HELOC
has variable rates and offers a flexible payment schedule. Home
equity loans and HELOCs are used for things like home
renovations, credit card debt consolidation, major medical bills,
education expenses and retirement income supplements. They
must be repaid in full if the home is sold

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Chapter V – Conclusion:
Human beings are no more constraint to the basic necessities in
their lives. Their needs havediversified through the ages placing
an increase demand on resources. The economic boom in the
countryhas wide open the new challenges and opportunities to
the people. This has necessitated timely and easyavailability of
funds to meet the requirements of institutions and individuals in
meeting their goals. Thus tokeep up with the pace of this increasing
demand, the banking industry have come forward with the
credit portfolio to provide funds on relatively easier terms and
conditions. Today, banks are committed towards providing more
and more number of people with finance with a view to make their lives
better.The ever increasing demands of the customers have forced
the banking sectors to emerge withnew retail products bearing
new unique features in them. The competition among the banks
cannot beneglected. They have been supplying loans for the purpose of
purchase of vehicles , pursue of higher education, or to meet their
other personal requirements.The banking industry is witnessing a
boom at present boosted by the increasing demand for retail loan
products. The demand has arisen as a result of genuine individual needs.
From an overall view point demand for retail loans is ever rising and the
same would be reflected on the demand for funds. Hencethe
profitability of this particular industry is expected to take a positive
track in the future ahead.

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