1. Loan
From Wikipedia, the free encyclopedia
For other uses, see Loan (disambiguation).
In finance, a loan is a debt evidenced by a note which specifies, among other things,
the principal amount, interest rate, 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.
In a loan, the borrower initially receives or borrows an amount of money, called
the principal, from the lender, and is obligated to pay back orrepay an equal amount of
money to the lender at a later time. Typically, the money is paid back in
regular installments, or partial repayments; in an annuity, each installment is the same
amount.
The loan is generally provided at a cost, referred to as interest on the debt, which
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 principal tasks for financial institutions. For
other institutions, issuing of debt contracts such asbonds is a typical source of funding.
Types of loans [edit]
Secured [edit]
See also: Loan guarantee
A secured loan is a loan in which the borrower pledges some asset (e.g. a
car or property) as collateral.
A mortgage loan is a very common type of debt instrument, used by many
individuals to purchase housing. In this arrangement, the money is used to

2. 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.
In some 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.
Unsecured [edit]
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:
credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
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. An unsecured

3. 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 [edit]
Demand loans are short term loans [1]
that are atypical in that they do not
have fixed dates for repayment and carry a floating interest rate which
varies according to the prime rate. They can be "called" for repayment by
the lending institution at any time. Demand loans may be unsecured or
secured.
Subsidized [edit]
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 [edit]
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 poor countries or may be
offered to employees of lending institutions as an employee benefit.

4. Target markets [edit]
Personal or commercial [edit]
See also: Credit_(finance)#Consumer_credit
Loans can also be subcategorized according to whether the debtor is an
individual person (consumer) or a business. 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.
For car loans in the U.S., the average term was about 60 months in 2009.[4]
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 [edit]
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:
Abuses in lending [edit]
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. Where the moneylender is not
authorized, they could be considered a loan shark.

5. 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".[6]
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.

6. Asset-based lending
From Wikipedia, the free encyclopedia
In the simplest meaning, asset-based lending is any kind of lending
secured by an asset. This means, if the loan is not repaid, the asset is
taken. In this sense, a mortgage is an example of an asset-backed loan.
More commonly however, the phrase is used to describe lending to
business and large corporations using assets not normally used in other
loans. Typically, these loans are tied to inventory, accounts receivable,
machinery and equipment.
This type of lending is usually done when the normal routes of raising
funds, such as the capital markets (selling bonds to investors) or normal
unsecured or mortgage secured bank lending is not possible. This is
usually because the company was unable to raise capital in the normal
marketplace or needs more immediate capital for project financing needs
(such as inventory purchases, mergers, acquisitions and debt purchasing).
It is usually accompanied by higher interest rates, and can be very lucrative
for the parent company. For example, the bank Wells Fargo made more
money from asset-based lending business than it did the rest of its
corporate business (both lending and fee based services).[citation needed]
Many financial services companies now use asset-based lending package
of structured and leveraged financial services. Most banks, both national
investment banks (Goldman Sachs, RBC) and conglomerates (i.e.
Citigroup, Wells Fargo), along with regional banks, offer these services to
corporate clients.
Asset-based lenders are known for taking out tombstone ads in much the
same way as investment banks.

7. Features of asset-based loans [edit]
Main article: Asset-based loan
An asset based business line of credit is usually designed for the same
purpose as a normal business line of credit - to allow the company to
bridge itself between the timing of cashflows of payments it receives and
expenses. The primary timing issue involves what are known as accounts
receivables - the delay between selling something to a customer and
receiving payment for it. A non asset based line of credit will have a credit
limit set on account opening by the accounts receivables size, to ensure
that it is used for the correct purpose. An asset based line of credit
however, will generally have a revolving credit limit that fluctuates based on
the actual accounts receivables balances that the company has on an
ongoing basis. This requires the lender to monitor and audit the company
to evaluate the accounts receivables size, but also allows for larger limit
lines of credits, and can allow companies to borrow that normally would not
be able to. Generally, terms stipulating seizure of collateral in the event of
default allow the lender to profitably collect the money owed to the
company should the company default on its obligations to the lender.
Factoring of receivables, is a subset of asset-based lending (which uses
inventory or other assets as collateral). The lender mitigates its risk by
controlling who the company does business with to make sure that the
company's customers can actually pay.
Lines of credits may require that the company deposit all of its funds into a
"blocked" account. The lender then approves any withdrawals from that

8. account by the company and controls when the company pays down the
line of credit balance.
Still another subset of a collateralized loan is a Pledging of
Receivables and an Assignment of Receivables as Collateral for the
Debt. In many instances, Receivables are transferred to the lender when
they are Pledged as Collateral. When the Receivables are Pledged
as Collateral, or Assigned with the condition that the Lender "has
Recourse" in the event the Receivables are uncollectible,
the Receivables continue to be reported as the borrower's asset on the
borrower's Balance Sheet and only a Footnote is required to indicate
these Receivables are used as Collateral for debt. The debt is reported as
a Liability on the borrower's Balance Sheet and as an Asset (a Receivable)
on the Lender’sBalance Sheet. In some situations, the lender can
actually Repledge or Sell the Collateral the borrower used to secure the
loan from the lender. In this instance, the borrower continues to recognize
the Receivables as an asset on the borrower's Balance Sheet, and the lender
only records the Liability associated with the obligation to return the asset.
Securities lending
In finance, securities lending or stock lending refers to the lending
of securities by one party to another. The terms of the loan will be governed
by a "Securities Lending Agreement", which requires that the borrower
provides the lender with collateral, in the form of cash, government
securities, or a Letter of Credit of value equal to or greater than the loaned

9. securities. The agreement is a contract enforceable under relevant law,
which is often specified in the agreement.
As payment for the loan, the parties negotiate a fee, quoted as an
annualized percentage of the value of the loaned securities. If the agreed
form of collateral is cash, then the fee may be quoted as a "short rebate",
meaning that the lender will earn all of the interest which accrues on the
cash collateral, and will "rebate" an agreed rate of interest to the borrower.
Market size [edit]
Until the start of 2009 Securities Lending was only an over-the-
counter market, so the size of this industry was difficult to estimate
accurately. According to the industry group ISLA, in the year 2007 the
balance of securities on loan globally exceeded £1 trillion.[1]
An example [edit]
In an example transaction, a large institutional money manager with a
position in a particular stock would allow those securities to be borrowed by
a securities lender. The securities lender (investment bank) would then
allow a short seller to borrow the stock and sell it. The short seller would
like to buy the stock back at a lower price (which would create a profit).
Once the shares are borrowed and sold, it generates cash from selling the
stock. That cash would become collateral for the borrow. The cash value of
the collateral would be marked-to-market on a daily basis so that it exceeds
the value of the loan by at least 2%. The institutional manager would have
access to the cash for overnight investment and maintains a long position
in the stock.

10. Legalities [edit]
Securities Lending is legal and clearly regulated in most of the world's
major securities markets. Most markets mandate that the borrowing of
securities be conducted only for specifically permitted purposes, which
generally include;
1. to facilitate settlement of a trade,
2. to facilitate delivery of a short sale,
3. to finance the security, or
4. to facilitate a loan to another borrower who is motivated by one of
these permitted purposes.
When a security is loaned, the title of the security transfers to the borrower.
This means that the borrower has the advantages of holding the security,
as they become the full legal and beneficial owner of it. Specifically, the
borrower will receive all coupon and/or dividend payments, and any other
rights such as voting rights. In most cases, these dividends or coupons
must be passed back to the lender in the form of what is referred to as a
"manufactured dividend".
The initial driver for the securities lending business was to cover settlement
failure. If one party fails to deliver stock to you it can mean that you are
unable to deliver stock that you have already sold to another party. In order
to avoid the costs and penalties that can arise from settlement failure, stock
could be borrowed at a fee, and delivered to the second party. When your
initial stock finally arrived (or was obtained from another source) lender
would receive back the same number of shares in the security they lent.
The principal reason for borrowing a security is to cover a short position. As
you are obliged to deliver the security, you will have to borrow it. At the end
of the agreement you will have to return an equivalent security to the
lender. Equivalent in this context means fungible, i.e. the securities have to

11. be completely interchangeable. Compare this with lending a ten euro note.
You do not expect exactly the same note back, as any ten euro note will
do.
Securities lending & borrowing is often required, by matter of law, to
engage in short selling. In fact, recent regulation in the United States
required that, before short sales were executed for 19 specific financial
stocks, the sellers first pre-borrow shares in those issues.[2]
This caused
securities lending volumes in these 19 issues to double.[3]
The SEC is
currently evaluating whether to extend such a rule to the wider market.[4]
Securities lenders [edit]
Securities lenders, often simply called sec lenders, are institutions which
have access to 'lendable' securities. This can be asset managers, who
have many securities under management, custodian banks holding
securities for third parties or third party lenders who access securities
automatically via the asset holder's custodian. The international trade
organization for the securities lending industry is the International
Securities Lending Association. According to a June 2004 survey, their
members had euro 5.99 billion worth of securities available for lending. In
the US, the Risk Management Association publishes quarterly surveys
among its (US based) members. In June 2005, these had USD 5,770
million worth of securities available.
Typical borrowers include hedge funds and the proprietary trading desks of
investment banks.
Term in investment banking [edit]
In investment banking, the term "securities lending" is also used to describe
a service offered to large investors who can allow the investment bank to
lend out their shares to other people. This is often done to investors of all
sizes who have pledged their shares to borrow money to buy more shares,

12. but large investors like pension funds often choose to do this to their
unpledged shares because they will receive interest income. In these types
of agreements, the investor still receives any dividends as normal, the only
thing they cannot generally do is to vote their shares.
Term in private securities-collateralized
lending [edit]
The term "securities lending" is sometimes used erroneously in the same
context as a "stock loan" or individual "securities-collateralized loan". The
former refers to the actual lending typically of banks or brokerages to other
institutions to cover short sales or for other temporary purposes. The latter
is used in private or institutional securities-backed loan arrangements
across a wide spectrum of securities. In recent years, FINRA has cautioned
all consumer to avoid nonrecourse transfer-of-title stock loans, but they
enjoyed a brief popularity before the SEC and IRS came to shut almost all
such providers down between 2007-2011, reclassifying nonrecourse
transfer-of-title title stock loans as fully taxable sales at inception. Today, it
is widely accepted that the only legally valid consumer lending programs
involving stocks or other securities are those in which the stocks remain in
the client's title and account without sale through a fully licensed and
regulated institution with membership in the SIPC, FIDC and other mainline
regulatory organizations.
Other alternatives include working with a reputable provider of securities
loans willing to provide references, track record of successful transactions
completed, and process of funding the loans and returning the collateral. In
2011, the Financial Industry Regulatory Authority (FINRA) issued an
investor alert on stock-based loan programs.[5]
In the alert, FINRA
recommend investors ask questions, including: 1)What happens to my
stock once I pledge it as collateral? 2) What benefit does the promoter

13. receive for recommending the program? And 3) Does the lender have
audited financials?
The Equities First Holdings (EFH) Executive Lending Survey conducted in
June 2012 found that 57% of the 400 respondents said they would
recommend a securities-based loan to a close friend for personal or
professional use. In that same survey, 47% of those polled said that low
interest rates are an important feature of securities-based loans.[6]

14. Peer-to-peer lending
Peer-to-peer lending (also known as person-to-person lending, peer-to-
peer investing, and social lending; abbreviated frequently as P2P
lending) is the practice of lendingmoney to unrelated individuals, or
"peers", without going through a traditional financial intermediary such as a
bank or other traditional financial institution. This lending takes place online
on peer-to-peer lending companies' websites using various different
lending platforms and credit checking tools.
Overview [edit]
Most peer-to-peer loans are unsecured personal loans, i.e. they are made
to an individual rather than a company and borrowers do not
provide collateral as a protection to the lender against default. Business
loans, including secured loans, are offered by some companies.[1]
The interest rates are set either by lenders who compete for the lowest rate
on the reverse auction model, or are fixed by the intermediary company on
the basis of their analysis of the borrower's credit.[2]
Borrowers assessed as
having a higher risk of default are assigned higher rates. Lenders mitigate
the risk that borrowers will not pay back the money they received by
choosing which borrowers to lend to and by diversifying their investments
among different borrowers. Lenders' investment in the loan is not protected
by any government guarantee. Bankruptcy of the peer-to-peer lending
company that facilitated the loan may also put the lenders’ investment at
risk.

15. The lending intermediaries are for-profit businesses; they generate revenue
by collecting a one-time fee on funded loans from borrowers and assessing
a loan servicing fee to investors, either a fixed amount annually or a
percentage of the loan amount.
Because many of the services are automated, the intermediary companies
can operate with lower overhead and provide the service cheaper than
traditional financial institutions, so that borrowers may be able to borrow
money at lower interest rates and lenders earn higher returns.
Characteristics [edit]
Peer-to-peer lending does not fit cleanly into any of the three traditional
types of financial institutions--deposit takers, investors, insurers[3]
--and is
sometimes categorized as analternative financial service.[4]
The key characteristics of peer-to-peer lending are:
it is conducted for profit
no necessary common bond or prior relationship between lenders and
borrowers
intermediation by a peer-to-peer lending company
transactions take place on-line
lenders may choose which loans to invest in
the loans are unsecured and not protected by government insurance
loans are securities that can be sold to other lenders
Early peer-to-peer lending was also characterized by disintermediation and
reliance on social networks but these features have started to disappear.
While it is still true that the emergence of internet and e-commerce makes it
possible to do away with traditional financial intermediaries and that people
may be less likely to default to the members of their own social
communities, the emergence of new intermediaries has proven to be time

16. and cost saving, and extending crowdsourcing to unfamiliar lenders and
borrowers open up new opportunities.
Most peer-to-peer intermediaries provide the following services:
on-line investment platform to enable borrowers to attract lenders and
investors to identify and purchase loans that meet their investment
criteria
development of credit models for loan approvals and pricing
verifying borrower identity, bank account, employment and income
performing borrower credit checks and filtering out the unqualified
processing payments from borrowers and forwarding those payments to
the lenders who invested in the loan
servicing loans, providing customer service to borrowers and attempting
to collect payments from borrowers who are delinquent or in default
legal compliance and reporting
finding new lenders and borrowers (marketing)
Comparison to other financial practices [edit]
Peer-to-peer lenders offer a narrower range of services than traditional
banks, and in some jurisdictions may not be required to have a banking
license. Peer-to-peer loans, are funded by investors who can choose the
loans they fund; sometimes as many as several hundred investors fund
one loan; banks, on the other hand, fund loans with money from multiple
depositors or money that they have borrowed from other sources; the
depositors are not able to choose which loans to fund.. Because of these
differences, peer-to-peer lenders are considered non-banking financial
companies.
Similar to retail banking, peer-to-peer lenders execute transactions directly
with consumers, rather than businesses or secondary financial
intermediaries.

17. Like community development banks and alternative financial
services institutions, some peer-to-peer lenders originally targeted
customers from "financially underserved", low- to moderate-income
demographics by providing loans that they could not practically obtain from
traditional banks. This feature has been decreasing because such
borrowers are more likely to have difficulties with paying back the loans,
and peer-to-peer lenders have started to refuse their loan requests.
Peer-to-peer lending differs from cooperative banking, credit
unions, savings and loan associations, building societies, mutual savings
banks and other similar non-bank mutual organizations in that lenders and
borrowers do not own the intermediary and are not granted membership or
voting rights to direct the financial and managerial goals of the
organization; the roles of both borrowers and lenders are kept distinct from
that of the owner. The borrowers, lenders and owners are not required to
share any common bonds (such are of locality, employer, religion or
profession). Operating costs are funded not only by customer fees but also
by investments from private investors. The goals of operation are
neither non-profit nor not-for-profit but to maximize profit.
The latter characteristic distinguishes peer-to-peer lending also
from person-to-person charities, person-to-person
philanthropy, collaborative finance and crowdfunding which create
connections between donors and recipients of donations like peer-to-peer
lenders but are non-profit movements.
Peer-to-peer lending differs from microfinance by not lending to (small)
businesses and groups of micro-entrepreneurs but to unrelated individuals
for their individual needs. It differs from microcredit by lending to borrowers
with verifiable credit history; the loan amount can be larger than microloans
and although collateral is not requested, it is not assumed to be non-
existent.

18. Compared to stock markets, peer-to-peer lending tends to have both
less volatility and less liquidity.[5]
Advantages and criticism [edit]
Interest rates [edit]
One of the main advantages of person-to-person lending for borrowers has
been better rates than traditional bank rates can offer (often below 10%.[38]
)
The advantages for lenders are higher returns than obtainable from a
savings account or other investments.[39]
Both of these benefits are the
result of disintermediation, since peer-to-peer lenders avoid the costs of
physical branches, capital reserves, and high overhead costs borne by
traditional financial institutions with many employees and costly locations.
The on-line trading platforms provided by peer-to-peer lenders have the
benefit that loan application and the transfer of funds takes less time and
both borrowers and lenders can access their money faster.
As peer-to-peer lending companies and their customer base continue to
grow, marketing and operational costs continue to increase, and
compliance to legal regulations becomes more complicated. This can
cause many of the original benefits from disintermediation to fade away
and turns peer-to-peer companies into new intermediaries, much like the
banks that they originally differentiated from. Such process of re-
introduction of intermediaries is known as reintermediation.
Credit risk [edit]
Peer-to-peer lending also attracts borrowers who, because of their credit
status or the lack of thereof, are unqualified for traditional bank loans.

19. Because past behavior is frequently indicative of future performance and
low credit scores correlate with high likelihood of default, peer-to-peer
intermediaries have started to decline a large number of applicants and
charge higher interest rates to riskier borrowers that are approved.[24]
Some
broker companies are also instituting funds into which each borrower
makes a contribution and from which lenders are recompensed if a
borrower is unable to pay back the loan.[6]
It seemed initially that one of the appealing characteristics of peer-to-peer
lending for investors was low default rates, e.g. Prosper's default rate was
quoted to be only at about 2.7 percent in 2007.[39]
The actual default rates for the loans originated by Prosper in 2007 were in
fact higher than projected. Prosper's aggregate return (across all credit
grades and as measured by LendStats.com, based upon actual Prosper
marketplace data) for the 2007 vintage was (6.44)%, for the 2008 vintage
(2.44)%, and for the 2009 vintage 8.10%. Independent projections for the
2010 vintage are of an aggregate return of 9.87.[40]
During the period from
2006 through October 2008 (referred to as 'Prosper 1.0'), Prosper issued
28,936 loans, all of which have since matured. 18,480 of the loans fully
paid off and 10,456 loans defaulted, a default rate of 36.1%. $46,671,123
of the $178,560,222 loaned out during this period was written off by
investors, a loss rate of 26.1%.[41]
Since inception, Lending Club’s default rate ranges from 1.4% for top-rated
three-year loans to 9.8% for the riskiest loans.[16]
The UK peer-to-peer lenders quote the ratio of bad loans at 0.84% for Zopa
of the £200m during its seven year lending history, and 2.8% for Funding
Circle. This is comparable to the 3-5% ratio of mainstream banks and the
result of modern credit models and efficient risk management technologies
used by P2P companies.[10]

20. Government protection [edit]
Because, unlike depositing money in banks, peer-to-peer lenders can
choose themselves whether to lend their money to safer borrowers with
lower interest rates or to riskier borrowers with higher returns, peer-to-peer
lending is treated legally as investment and the repayment in case of
borrower defaulting is not guaranteed by the federal government
(U.S. Federal Deposit Insurance Corporation) the same way bank deposits
are.[8]
A class action lawsuit, Hellum v. Prosper Marketplace, Inc. is currently
pending in Superior Court of California on behalf of all investors who
purchased a note on the Prosper platform between January 1, 2006 and
October 14, 2008. The Plaintiffs allege that Prosper offered and sold
unqualified and unregistered securities, in violation of California and federal
securities laws during that period. Plaintiffs further allege that Prosper
acted as an unlicensed broker/dealer in California. The Plaintiffs are
seeking rescission of the loan notes, rescissory damages, damages, and
attorneys’ fees and expenses. [42]