Financial Management

Posts Tagged ‘Loan’

Duties or obligations to pay money, deliver goods or provide services under the agreement express or implied. People who owe, is a debtor or the debtor, one for whom it owes lender, or lenders. The use of debt in the financial structure of companies create financial leverage that can breed generate investment returns generated by the debt exceeds the cost. Because of the interest paid on debt can be written off as an expense, debt is usually the cheapest type of long-term funding.

People or organizations often make arrangements to borrow something. Both sides must agree on some standard of deferred payment, most usually a sum of money in the currency as the unit of currency, but sometimes good like. For example, people can borrow the stock, in this case, a person can pay for them later with shares, plus a premium for the privilege of borrowing, or the amount of money needed to buy it on the market at that time.

There are different types of debt obligations. They include loans, bonds, mortgages,  notes, and debentures. It is very common to borrow large sums of money for big purchases, like mortgages, and pay back with an agreed premium interest rate over time or all at once at a later date. The amount of money outstanding is usually called a debt. debt will increase over time if not paid sooner rather than growing. In some economic systems this effect is called usury, on the other, “usury” refers only to excessive interest rate, which exceeds a reasonable profit above the acceptable risk.

A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change. As a result, your payments will vary as well (as long as your payments are blended with principal and interest).

Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for that loan’s entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan.

When a loan is fixed for its entire term, it will be fixed at the then prevailing market interest rate, plus or minus a spread that is unique to the borrower. Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. Depending on the terms of your agreement, your interest rate on the new loan will remain fixed, even if interest rates climb to higher levels. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan. As interest rates fall, so will the interest rate on your loan.

This discussion is simplistic, but the explanation will not change in a more complicated situation. It is important to note that studies have found that over time, the borrower is likely to pay less interest overall with a variable rate loan versus a fixed rate loan. However, the borrower must consider the amortization period of a loan. The longer the amortization period of a loan, the greater the impact a change in interest rates will have on your payments.

Therefore, adjustable-rate mortgages are beneficial for a borrower in a decreasing interest rate environment, but when interest rates rise, then mortgage payments will rise sharply.

What About a Credit Rating?
In addition to using credit (FICO) scores, most countries (including the U.S. and Canada) use a scale of 0-9 to rate your personal credit. On this scale, each number is preceded by one of two letters: “I” signifies installment credit (like home or auto financing), and “R” stands for revolving credit (such as a credit card).

Each creditor will issue its own rating for individuals. For example, you may have an R1 rating with Visa (the highest level of credit rating), but you might simultaneously have an R5 from MasterCard if you’ve neglected to pay your MasterCard bill for many months. Although the “R” and “I” systems are still in use, the prevailing trend is to move away from this multiple rating scale toward the single digit FICO score

Small Business Loans
The Small Business Administration (SBA) or your local bank typically extend small business loans to would-be entrepreneurs, but only after they’ve submitted (and received approval for) a formal business plan. The SBA and other financial institutions typically require that the individual personally guarantee the loan, which means that they will probably have to put up personal assets as collateral in case the business fails. Loan amounts can range from a few thousand to a few million dollars, depending on the venture.

While the term of the loan may vary from institution to institution, typically, consumers will have between five and 25 years to repay the loans. The amount of interest incurred from the loan depends on the lending institution in which the loan is made. Keep in mind that borrowers can negotiate with the lending institution with regard to the level of interest charged. However, there are some loans on the market that offer a variable rate.

Small business loans are the way to go for anyone looking to fund a new or existing business. However, be forewarned: getting a business plan approved by the lending institution may be difficult. In addition, many banks are unwilling to finance “cash businesses” because their books (ie. tax records) often do not accurately reflect the health of the underlying business.