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From Wikipedia, the free encyclopedia

In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e. the borrower) incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

The document evidencing the debt, e.g. a promissory note, will normally specify, 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.

The interest 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 main activities of 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.

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what is up I'm Jason with the honest finance Channel today I want to talk to you guys about the three best personal loans that I've found and seriously I looked everywhere for a personal loan I checked banks I checked credit unions I checked online I had to look everywhere because I needed one in my personal life and now I'm gonna share with you guys the three best companies that I found so you can make your own decision if you're looking for a personal loan so in this video I'm gonna go over why you'd actually want a personal loan and I'll cover the three loans that I found and I'll go over the pros and cons of each of them so that you can make your own decision if you're looking for a personal loan now if you just came across this channel I do talk a lot about financial subjects so if you're interested in this type of content then feel free to subscribe or at least give the video a like so the first question you'll be asking is why exactly would you want to get a personal loan so for me personally I had to look for a personal loan because I had a ginormous yard project that I had to complete and I didn't want to do a home equity loan or anything like that because the rates and terms were a lot more simplified to just do a personal loan so basically if you've got big home improvements or you're gonna do something expensive like adoption or you've got really expensive medical bills then I would suggest going with a personal loan and I'd also recommend one if you're trying to consolidate your credit card debt because if you've got credit card debt and you take a personal loan then the rate on the personal loan is probably going to be a lot better than your credit cards rate and in the financial terminology they would call this a debt consolidation loan you're just taking your credit card debt and you're moving it into a personal loan that hopefully has a better rate the only warning that I have though with consolidating credit card debt is that you've got to get on top of your credit cards otherwise you're going to end up with two bills if you don't change your spending habits you're gonna end up with a personal loan and you're gonna have credit card debt so everything's just going to get worse so if you do end up consolidating your credit card debt through a personal loan or anything like that then just make sure your spending habits change so you don't end up having credit card debt again so the three companies that I'm gonna talk about they don't actually charge your adjacent fees and they don't have prepayment penalties like some of the other guys do so when most of us think of personal loans we're gonna think of companies like Lending Club and prosper because those are the ones that pop up all over the place online but most of these guys actually charge origination fees and 1% on like $10,000 is only a hundred bucks but it's still a hundred bucks that you're giving up when some of the other guys don't actually charge that and most of the big banks and the credit unions that I looked into had rates that were so high that I didn't even bother looking any further so with all the research that I had to do to figure out which personal loan I actually wanted to go with the conclusion I came to was these three specific companies and that's because they didn't charge any dirty fees they didn't have prepayment penalties and their rates and their terms were really good so one more thing I want to mention about these lenders and getting personal loans is that you have to have a really high credit score in order to even qualify for these loans through these lenders so if you've got a really bad score and I would probably look into some other companies because these ones are just based on really good credit scores and seriously if your credit score sucks then I would highly suggest trying to improve it because you're never gonna get good rates on any type of money that you're trying to borrow so the first lender for personal loans that I want to talk about is American Express so honestly I had no idea that American Express tat personal loans I just thought that they focused mainly on credit cards but apparently they do personal loans and they even have savings accounts that have better rates than most banks and once I started looking into American Express as personal loans they actually had really good rates and really good terms their rates are currently about seven to twenty percent you can borrow thirty five hundred to forty thousand dollars from American Express and they offer 12 24 and 36 month loans so when you compare these numbers to other lenders American Express is extremely competitive but just keep in mind that you do have to be an American Express card holder in order to actually get one of these personal loans from them now take a look at this ad that I got from American Express yesterday when I was doing the script for this video now it's kind of creepy that they actually sent me one of these ads because it's like they knew that I was looking up all this personal loan stuff but it looks as though I'm pre-qualified for a 7% rate for $25,000 if that's how much I wanted from their personal loan so it looks like I'm already pre-approved for those rates and I didn't have to do anything I just logged into my American Express account and I had a pop up with that app so if the research I did on American Express personal loans I found out that the money that you're borrowing from them and how long you're planning on paying it back doesn't really determine your rate as much as your Oh score does so with them it doesn't really matter how much money you're borrowing or how long you're planning on paying the money back they just care about what your credit score is in determining the final interest rate that you're gonna get for that loan the only thing I didn't like was that their terms only went up to thirty six months so if you needed a lot of money and you wanted 60 months you can't do it with them but out of the three lenders that I'm talking about American Express was the best when it came to borrowing a little bit of money for a little bit of time because they're the only ones that will do it thirty five hundred dollar minimum and they even offer the 12-month loan payback period so in my opinion American Express is the best option if you're just borrowing a little bit of money for a little bit of time also if you are interested in any of these personal loans that I'm talking about I will link to their websites in my description so that you can find out more about them and if you're curious I did check Discover Card for one of their personal loans because I know that they do them too but their rate came in about six points higher than any of the other guys so I didn't even look any further into them I mean seriously it was a really bad break from them but if you want to check them out go ahead I did they just didn't come out with a rate that was good enough for me next on my list of personal loans is called sofa which stands for social finance now these guys have only been around since 2011 but don't let that fool you because they've changed the industry with the way their business model works they've taken everything that we don't like about traditional loans and they've seriously fixed it with their business model they advertise from the very beginning that they don't have any hidden fees that they have low rates and that they have really good terms so their big thing is that they don't hide anything from their customers everything is what it is with social finance and that's awesome because you know exactly what you're gonna be getting so if I off our student loans mortgages and personal loans so if you're in the market for any of these types of loans so fight is one that you really want to check out so fight advertises that they don't even charge an origination fee on mortgages which is typically about 1% that you're just giving up whenever you get one of those loans and traditionally if you don't have 20% down on a house then you have to pay mortgage insurance but so Phi it doesn't even charge you mortgage insurance with one of their loans if you have less than 20% social finance is kind of the new way to get loans and they've proven it because they've actually lend it out over 30 billion dollars so far they'll even give you half a quarter percent discount if you have more one loan with them - and they even offer what they call unemployment protection which means if you lose your job they'll actually freeze your payments temporarily until you find a new job so that's kind of nice - so currently Sophie offers personal loans from about five and a half percent to fourteen percent and they'll let you borrow between 5000 and $100,000 and then you can choose to pay them back between three and seven years one thing I did notice though is that their loans fluctuate based on how long you keep them and how much you're financing so keep that in mind if you're gonna consider sofa so I found that their best rates are actually the 36 month terms with lower amounts borrowed so just keep that in mind so for instance their lowest advertised rate at five and a half percent that one's only gonna work for you if you do a 36 month loan with them but if you do go with the longer term they still have really good rates you're just only gonna get the best rate if you go with the 36 month term and I also notice that they're not as picky about what you're using the money for and that's a good thing because a lot of the other lenders are really picky when it comes to what you're using the money for so just keep that in mind - so in my opinion I think that everybody should at least consider sofa if they're looking for a personal loan really the only problem I have with them is that their minimum amount you can borrow is $5,000 which American Express had at 3,500 bucks so it's a lot easier to get a little bit of money from American Express than it is with sofa so the minimum amount was the only thing that bothered me about them everything else seemed to be extremely competitive and really good in my opinion no I do have their link in the description and I think they give you some sort of a bonus by using my affiliate link so go ahead and use that link if you are actually looking for a personal loan from them now last on my list of personal loans is called light stream by SunTrust Bank these guys are actually big bank owned because of SunTrust but they offer some of the best rates and the best terms that I found from all of these different companies and they do advertise that there'll be any competitors rate by a tenth of a point as long as it's the same type of loan light streams personal loan rates are about 3 to 14 percent which is incredible and they'll also loan between 5,000 and $100,000 their term length ranges from 24 to a hundred and forty four months which is actually 12 years if you really wanted to max it out that long I would advise though that you don't go with 144 months if you're going with a personal loan but that's just my opinion now don't let any of these numbers deceive you with light stream loans because everything fluctuates depending on what you're doing with the loan how much money you're borrowing and how long you're planning on paying it back for so it's not like you can borrow the minimum $5,000 and finance it over a hundred and forty four months everything that lights dream offers is dependent upon their predetermined categories but don't let that deceive you because their rates are incredible I found with light stream that if you borrow between about ten thousand dollars and twenty five thousand dollars and you borrow it for 24 to 36 months then you're gonna get the best rates that they offer and I found that the lower amounts of money that you borrow from them actually have higher rates than borrowing more money so if you do want to borrow less than $10,000 then I'd suggest going with the other guys instead and I did notice with light stream that their lowest advertised rates are for auto loans only so don't expect to get a 3% rate if you're consolidating your credit cards I found that most of the categories ranged from about 6 to 8% an interest so just keep that in mind if you're looking at these guys now out of these three different companies that I looked into I actually ended up going with light stream loans I probably would have preferred to go with social finance but I ended up going with light stream loans because they actually came in about a point and a half lower than the other guys did but that was for me personally so you'll want to check all of these different lenders to see which rates you're gonna end up qualifying for because I didn't have an origination fee or anything like that I just went with whomever gave me the best rate and for me at the time it happened to be light stream loans now these are the three best picks that I found but feel free and commenting below if you know of any personal loans that I didn't mention that actually have better rates so maybe you do know of some better personal loans out there but these are the three best that I found and that's from all the research that I did once again I'm Jason with the honest finance Channel if you did find this information helpful then feel free and subscribing to my channel or at least give the video a like that's all

Contents

Types of loans

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or house) as collateral.

A mortgage loan is a very common type of loan, used by many individuals to purchase residential property. The lender, usually a financial institution, is given security – a lien on the title to the property – 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.

Similarly, a loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter – often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. In a direct auto loan, a bank lends the money directly to a consumer. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer.

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:

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.

Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

Demand

Demand loans are short-term loans[1] that typically do not have fixed dates for repayment. Instead, demand loans carry a floating interest rate which varies according to the prime lending rate or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.

Subsidized

A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of college loans in the United States, it refers to a loan on which no interest is accrued while a student remains enrolled in education.[2]

Concessional

A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods or a combination of both.[3] Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an employee benefit (sometimes called a perk).

Target markets

Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a business.

Personal

Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans and payday loans. The credit score of the borrower is a major component in and underwriting and interest rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well.[4]

Commercial

Loans to businesses are similar to the above, but also include commercial mortgages and corporate bonds. Underwriting is not based upon credit score but rather credit rating.

Loan payment

The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time.[5]

The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is:

For more information see Compound interest#Monthly amortized loan or mortgage payments.

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; subprime mortgage-lending[6] and payday-lending[7] are two examples, where the moneylender is not authorized or regulated, the lender 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 organizations of lending at usurious interest rates and making money out of frivolous "extra charges".[8]

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 codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations – another set of rules that interpret the Internal Revenue Code).[9]:111

1. A loan is not gross income to the borrower.[9]:111 Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.[9]:111[10]

2. The lender may not deduct (from own gross income) the amount of the loan.[9]:111 The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).[9]:111 Deductions are not typically available when an outlay serves to create a new or different asset.[9]:111

3. The amount paid to satisfy the loan obligation is not deductible (from own gross income) by the borrower.[9]:111

4. Repayment of the loan is not gross income to the lender.[9]:111 In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.[9]:111

5. Interest paid to the lender is included in the lender’s gross income.[9]:111[11] 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.[9]:111 Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest.[9]:112

6. Interest paid to the lender may be deductible by the borrower.[9]:111 In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible.[9]:111The major exception here is interest paid on a home mortgage.[9]:111

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.[9]:111[12] 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 61(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 is 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.[13][14]

See also

US specific:

References

  1. ^ Signoriello, Vincent J. (1991), Commercial Loan Practices and Operations, ISBN 978-1-55520-134-0
  2. ^ Subsidized Loan - Definition and Overview at About.com. Retrieved 2011-12-21.
  3. ^ Concessional Loans, Glossary of Statistical Terms, oecd.org, Retrieved on 5/5/2013
  4. ^ "Average new-car loan a record 65 months in fourth quarter". Reuters. August 6, 2017. Retrieved 2017-08-06.
  5. ^ Guttentag, Jack (October 6, 2007). "The Math Behind Your Home Loan". The Washington Post. Retrieved May 11, 2010.
  6. ^ "Predators try to steal home". money.cnn.com. [CNN]. 18 Apr 2000. Retrieved 7 Mar 2018.
  7. ^ Horsley, Scott; Arnold, Chris (2 Jun 2016). "New Rules To Ban Payday Lending 'Debt Traps'". National Public Radio. Retrieved 7 Mar 2018.
  8. ^ "Credit card holders pay Rs 6,000 cr 'extra'". The Financial Express (India). Chennai, India]. 3 May 2007. Archived from the original on 2007.
  9. ^ a b c d e f g h i j k l m n o p Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007).
  10. ^ 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).
  11. ^ 26 U.S.C. 61(a)(4)(2007).
  12. ^ 26 U.S.C. 61(a)(12)(2007).
  13. ^ 26 U.S.C. 108(2007).
  14. ^ EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 Banks Need Long-Term Rainy Day Funds
This page was last edited on 24 May 2019, at 12:13
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