A loan transaction is an activity in which the one person, generally called as borrower, receives an amount of money at the beginning from another person, generally called as lender. The concerned amount is called as the principal and is obligated to pay back in equal amounts of money to the lender after a certain time.
The lender usually charges a fees or cost of this service to the borrower called as interest. In modern times, there are financial institutions which act as a provider of loans and they give funds to be utilized for projects. Sometimes they issue bonds that are typical source of funding for short term projects. Loans are provided under the regulations governed by authorities and enforced according the law.
Certain Types of loans:
Loans can be categorized into different types. Sometimes these loans are categorized as per the nature of the borrower, whether it is an individual person or an organization. Common personal loans have different types according the purpose for which they are taken like include mortgage loans, home financing, credit cards, installment loans and car loans.
Buyers may opt for smaller monthly payments of loans as per their convenience but it will result in longer payment terms and increased interest. Loans given for commercial purposes to organizations also include commercial mortgages, syndicated finances and corporate bonds.
Lending Laws as per US Regulation:
In United States, the Congress (the Internal Revenue Code) and the Treasury Department have set the basic rules for loan transactions to make them enforceable and taxable in the jurisdiction of United States. But generally these rules are universally accepted whether written in a contract or not. The low taxability of loan transactions increase the volume of this type of trade and an increase in State’s rate of return also increase the interest income of lenders.
Importance of Lending in an Economy:
Lending is also important because it is a great source of funding for different commercial and public projects. It is also important in equal distribution of wealth as the money change hands. Personal loans are sometimes utilized for financing of small or medium nature projects. State always put emphasis on lending through its regulations to encourage people on saving today and spending tomorrow. But too much increase in lending may result in decrease spending that can cause problem of production in an economy in excess of the consumption requirement.