Loans entail the exchange of financial assets, between the lender and the borrower. The loan is typically rendered at a cost, which translates into a substantial profit for the bank. Loan convenants are in some cases imposed through the loan contract, and they relate to the obligations and restrictions that are binding on the borrower.
The borrower of the loan is obliged to return the loan on maturity as a way of refinancing the principal amount owed. The loan arrangement is instigated when the contract is signed and the lender has paid the loan proceeds to the borrower.
There are many other types of loans available to borrowers and these include bullet loans – once-off repayment at maturity; annuity loan – the annual repayment amount always equal to that of interest payments, this increases the amount of repayment during the term and the interest portion decreases accordingly.
Demand loans are short term loans that are irregular because they do not come with fixed dates for repayment and are disbursed on the grounds of a floating interest rate which is dependent on the prime rate. With demand loans a financial institution has the power to call for repayment at any stage, whether the loan is secured or unsecured.
A pre-settlement loan – issued on the grounds of an awardable amount ascertained in a lawsuit case, and unsecured loans are not secured against the borrower’s assets. These can include corporate bonds, credit card debt, personal loans, bank overdrafts and other lines of credit.
A stock hedge loan – the lender hedges the stock of a borrower to protect against possible loss; participating loan – the lender receives a participation profit instead of or in addition to interest.
The principles behind special loans are in stark contrast to the rental or lease agreement in that the lender gives the borrower temporary ownership of a given property or object. The borrower is therefore entitled to use the property for the duration of the lease agreeement.
The contractual relationship between lessor and lessee is a persistent obligation. With the loan arrangements such as loans issued between relatives, there may be no written agreement, because the repayment obligation does not constitute the consideration for the receipt of the loan.
If the parties decide on termination prior to the due date, the notice period is three months and if they agree on a fixed term, the parties could still terminate the loan prematurely.
Effective cost is an indicator used to find the cheapest loan, there are guidelines for calculating the effective yield. For a precise calculation the traditional pension calculation is implemented, taking into account the interest rate among other things.