is a type of debt. All material things can be lent; this article,
however, focuses exclusively on monetary loans. Like all debt
instruments, a loan entails the redistribution of financial
assets over time, between the lender and the borrower. The borrower
initially receives an amount of money from the lender, which
they pay back, usually but not always in regular installments,
to the lender. This service is generally provided at a cost,
referred to as interest on the debt. A borrower may be subject
to certain restrictions known as loan covenants under the terms
of the loan.Acting as a provider of loans is one of the principal
tasks for financial institutions. For other institutions, issuing
of debt contracts such as bonds is a typical source of funding.
Bank loans and credit are one way to increase the money supply.Legally,
a loan is a contractual promise of a debtor to repay a sum of
money in exchange for the promise of a creditor to give another
sum of money.
loan is a loan in which the borrower pledges some asset (e.g.
a car or property) as collateral for the loan.
loan is a very common type of debt instrument, used by many
individuals to purchase housing. In this arrangement, the money
is used to purchase the property. The financial institution,
however, is given security - a lien on the title to the house
- 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.
instances, a loan taken out to purchase a new or used car may
be secured by the car, in much the same way as a mortgage is
secured by housing. The duration of the loan period is considerably
shorter - often corresponding to the useful life of the car.
There are two types of auto loans, direct and indirect. A direct
auto loan is where a bank gives the loan directly to a consumer.
An indirect auto loan is where a car dealership acts as an intermediary
between the bank or financial institution and the consumer.
A type of
loan especially used in limited partnership agreements is the
hedge loan is a special type of securities lending whereby the
stock of a borrower is hedged by the lender against loss, using
options or other hedging strategies to reduce lender risk.
loans are monetary loans that are not secured against the borrowers
assets. These may be available from financial institutions under
many different guises or marketing packages:
facilities or lines of credit
- corporate bonds
rates applicable to these different forms may vary depending
on the lender, 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.
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. Where the moneylender
is not authorised, it could be considered a loan shark.
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 organisations of lending at usurious
interest rates and making money out of frivolous "extra charges"
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.
the basic rules governing how loans are handled for tax purposes
in the United States are uncodified by both Congress (the Internal
Revenue Code) and the Treasury Department (Treasury Regulations
another set of rules that interpret the Internal Revenue Code).
Yet such rules are universally accepted.
loan is not gross income to the borrower. Since the borrower has the obligation to repay the loan, the
borrower has no accession to wealth.
lender may not deduct the amount of the loan. The rationale here is that one asset (the
cash) has been converted into a different asset (a promise of
are not typically available when an outlay serves to create
a new or different asset.
3. The amount
paid to satisfy the loan obligation is not deductible by the borrower.
of the loan is not gross income to the lender. In effect, the promise of repayment is converted
back to cash, with no accession to wealth by the lender.
paid to the lender is included in the lender™s gross income.
Interest paid represents compensation for the use of the lenderâ€™s
money or property and thus represents profit or an accession
to wealth to the lender. Interest income can be attributed to lenders even if the
lender doesnâ€™t charge a minimum amount of interest.
paid to the lender may be deductible by the borrower. In general, interest paid in connection
with the borrower™s business activity is deductible, while interest
paid on personal loans are not deductible. The major exception here is interest paid on a home mortgage.
from discharge of indebtedness
a loan does not start out as income to the borrower, it becomes
income to the borrower if the borrower is discharged of indebtedness.
 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 â€śIncome
from Discharge of Indebtednessâ€ť in Section 62(a)(12) as a
source of gross income.
X owes Y $50,000. If Y discharges the indebtedness, then X no
longer owes Y $50,000. For purposes of calculating income, this
should be treated the same way as if Y gave X $50,000.
- Credit card holders pay Rs 6,000 cr 'extra' May 03, 2007
Samuel A. Donaldson, Federal Income Taxation of Individuals:
Cases, Problems and Materials, 2nd Ed. 111 (2007).
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).
Donaldson, at 111.
26 U.S.C. 61(a)(4)(2007).
26 U.S.C. 61(a)(12)(2007).
26 U.S.C. 108(2007).