Lender definition

What is a Lender?

A lender is an individual, a public or private group, or a financial institution that makes funds available
to a person or business with the expectation that the funds will be repaid.

A lender is an individual, a public or private group, or a financial institution that makes funds available
to a person or business with the expectation that the funds will be repaid. Repayment will include the
payment of any interest or fees.1  Repayment may occur in increments, as in a monthly mortgage
payment (one of the largest loans consumers take out is a mortgage) or as a lump sum.2

KEY TAKEAWAYS

 A lender is an individual, a public or private group, or a financial institution that makes funds
available to a person or business with the expectation that the funds will be repaid.
 Repayment will include the payment of any interest or fees.
 Repayment may occur in increments (as in a monthly mortgage payment) or as a lump sum.

A lender is an entity that makes cash loans to other entities or individuals in exchange for either a
fixed or variable interest rate and a promise of repayment. Lenders are needed for several reasons,
including the following:

 To provide funding for major purchases

 To increase the amount of working capital funding

 To provide a backup line of credit to support irregular cash flows

Lenders may choose to offer only certain types of loans, or to restrict their lending activities to
certain types of entities. For example, a lender may specialize in mortgages to individuals, or lines
of credit to businesses

Mortgage loan basics

Basic concepts and legal regulation
Mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his or her interest
(right to the property) as security or collateral for a loan. Therefore, a mortgage is
an encumbrance (limitation) on the right to the property just as an easement would be, but because most
mortgages occur as a condition for new loan money, the word mortgage has become the generic term for
a loan secured by such real property. As with other types of loans, mortgages have an interest rate and are
scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and
usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.
Mortgage lending is the primary mechanism used in many countries to finance private ownership of
residential and commercial property (see commercial mortgages). Although the terminology and precise
forms will differ from country to country, the basic components tend to be similar:

 Property: the physical residence being financed. The exact form of ownership will vary from country
to country and may restrict the types of lending that are possible.
 Mortgage: the security interest of the lender in the property, which may entail restrictions on the use
or disposal of the property. Restrictions may include requirements to purchase home
insurance and mortgage insurance, or pay off outstanding debt before selling the property.
 Borrower: the person borrowing who either has or is creating an ownership interest in the property.
 Lender: any lender, but usually a bank or other financial institution. (In some countries, particularly
the United States, Lenders may also be investors who own an interest in the mortgage through
a mortgage-backed security. In such a situation, the initial lender is known as the mortgage
originator, which then packages and sells the loan to investors. The payments from the borrower are
thereafter collected by a loan servicer.[2])
 Principal: the original size of the loan, which may or may not include certain other costs; as any
principal is repaid, the principal will go down in size.
 Interest: a financial charge for use of the lender's money.
 Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the
property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is
arguably no different from any other type of loan.
 Completion: legal completion of the mortgage deed, and hence the start of the mortgage.
 Redemption: final repayment of the amount outstanding, which may be a "natural redemption" at the
end of the scheduled term or a lump sum redemption, typically when the borrower decides to sell the
property. A closed mortgage account is said to be "redeemed".

What Is a Mortgage?

The term mortgage refers to a loan used to purchase or maintain a home, land, or other types of real
estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are
divided into principal and interest. The property serves as collateral to secure the loan. A borrower must
apply for a mortgage through their preferred lender and ensure they meet several requirements, including
minimum credit scores and down payments. Mortgage applications go through a
rigorous underwriting process before they reach the closing phase. Mortgage types vary based on the
needs of the borrower, such as conventional and fixed-rate loans.

KEY TAKEAWAYS

 Mortgages are loans that are used to buy homes and other types of real estate.
 The property itself serves as collateral for the loan
 Mortgages are available in a variety of types, including fixed-rate and adjustable-rate.
 The cost of a mortgage will depend on the type of loan, the term (such as 30 years), and the
interest rate the lender charges.
  Mortgage rates can vary widely depending on the type of product and the qualifications of the
applicant.

What Is A Mortgage?

How Mortgages Work

Individuals and businesses use mortgages to buy real estate without paying the entire purchase price
upfront. The borrower repays the loan plus interest over a specified number of years until they own the
property free and clear. Mortgages are also known as liens against property or claims on property. If the
borrower stops paying the mortgage, the lender can foreclose on the property.

For example, a residential homebuyer pledges their house to their lender, which then has a claim on the
property. This ensures the lender's interest in the property should the buyer default on their
financial obligation. In the case of a foreclosure, the lender may evict the residents, sell the property, and
use the money from the sale to pay off the mortgage debt.

The Mortgage Process

Would-be borrowers begin the process by applying to one or more mortgage lenders. The lender will ask
for evidence that the borrower is capable of repaying the loan. This may include bank and investment
statements, recent tax returns, and proof of current employment. The lender will generally run a credit
check, as well.

If the application is approved, the lender will offer the borrower a loan of up to a certain amount and at a
particular interest rate. Homebuyers can apply for a mortgage after they have chosen a property to buy or
while they are still shopping for one, a process known as pre-approval. Being pre-approved for a
mortgage can give buyers an edge in a tight housing market because sellers will know that they have the
money to back up their offer.

Once a buyer and seller agree on the terms of their deal, they or their representatives will meet at what's
called a closing. This is the time the borrower makes their down payment to the lender. The seller will
transfer ownership of the property to the buyer and receive the agreed-upon sum of money, and the
buyer will sign any remaining mortgage documents.

Types of Mortgages

Mortgages come in a variety of forms. The most common types are 30-year and 15-year fixed-rate
mortgages. Some mortgage terms are as short as five years while others can run 40 years or longer.
Stretching payments over more years may reduce the monthly payment, but it also increases the total
amount of interest the borrower pays over the life of the loan.

The following are just a few examples of some of the most popular types of mortgage loans available to
borrowers.

Fixed-Rate Mortgages
With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as do the
borrower's monthly payments toward the mortgage. A fixed-rate mortgage is also called a traditional
mortgage. 

Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage  (ARM), the interest rate is fixed for an initial term, after which it can
change periodically based on prevailing interest rates. The initial interest rate is often a below-market
rate, which can make the mortgage more affordable in the short term but possibly less affordable long-
term if the rate rises substantially.

ARMs typically have limits, or caps, on how much the interest rate can rise each time it adjusts and in
total over the life of the loan.

Interest-Only Loans

Other, less common types of mortgages, such as interest-only mortgages and payment-option ARMs,
can involve complex repayment schedules and are best used by sophisticated borrowers.

Many homeowners got into financial trouble with these types of mortgages during the housing bubble of
the early 2000s.1

Reverse Mortgages

As their name suggests, reverse mortgages are a very different financial product. They are designed for
homeowners 62 or older who want to convert part of the equity in their homes into cash.

These homeowners can borrow against the value of their home and receive the money as a lump sum,
fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies,
moves away permanently, or sells the home. 2

Term Loan

What Is a Term Loan?

A term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing
terms. Term loans are normally meant for established small businesses with sound financial statements.
In exchange for a specified amount of cash, the borrower agrees to a certain repayment schedule with a
fixed or floating interest rate . Term loans may require substantial down payments to reduce the payment
amounts and the total cost of the loan.
KEY TAKEAWAYS

 A term loan provides borrowers with a lump sum of cash upfront in exchange for specific
borrowing terms.
 Borrowers agree to pay their lenders a fixed amount over a certain repayment schedule with
either a fixed or floating interest rate.
 Term loans are commonly used by small businesses to purchase fixed assets, such as equipment
or a new building.
 Borrowers prefer term loans because they offer more flexibility and lower interest rates.
 Short and intermediate-term loans may require balloon payments while long-term facilities come
with fixed payments.

Understanding Term Loans

Term loans are commonly granted to small businesses that need cash to purchase equipment, a new
building for their production processes, or any other fixed assets to keep their businesses going. Some
businesses borrow the cash they need to operate on a month-to-month basis. Many banks have
established term loan programs specifically to help companies in this way.

Business owners apply for term loans the same way they would any other credit facility—by
approaching their lender. They must provide statements and other financial evidence demonstrating
their creditworthiness.1  Approved borrowers get a lump sum of cash and are required to make payments
over a certain period of time, usually on a monthly or quarterly repayment schedule. 

Term loans carry a fixed or variable interest rate and a set maturity date. If the proceeds are used to
finance the purchase of an asset, the useful life of that asset can impact the repayment schedule. The loan
requires collateral and a rigorous approval process to reduce the risk of default or failure to make
payments. As noted above, some lenders may require down payments before they advance the loan.

Borrowers often choose term loans for several reasons, including:

 Simple application process

 Receiving an upfront lump sum of cash
 Specified payments
 Lower interest rates

Taking out a term loan also frees up cash from a company's cash flow in order to use it elsewhere.

Variable-rate term loans are based on a benchmark rate like the U.S. prime rate or the London
InterBank Offered Rate (LIBOR).2

Types of Term Loans

Term loans come in several varieties, usually reflecting the lifespan of the loan. These include:

 Short-term loans: These types of term loans are usually offered to firms that don't qualify for a
line of credit. They generally run less than a year, though they can also refer to a loan of up to 18
months.3
  Intermediate-term loans: These loans generally run between one to three years and are paid in
monthly installments from a company’s cash flow.
 Long-term loans: These loans last anywhere between three to 25 years. They use company
assets as collateral and require monthly or quarterly payments from profits or cash flow. They
limit other financial commitments the company may take on, including other debts, dividends, or
principals' salaries, and can require an amount of profit set aside specifically for loan repayment.

Both short- and intermediate-term loans may also be balloon loans and come with balloon payments.
This means the final installment swells or balloons into a much larger amount than any of the previous
ones.

 
While the principal of a term loan is not technically due until maturity, most term loans operate on a
specified schedule requiring a specific payment size at certain intervals.

Example of a Term Loan

A Small Business Administration (SBA) loan, officially known as a 7(a) guaranteed loan, encourages
long-term financing. Short-term loans and revolving credit lines are also available to help with a
company’s immediate and cyclical working capital needs. 1

Maturities for long-term loans vary according to the ability to repay, the purpose of the loan, and the
useful life of the financed asset. Maximum maturity dates are generally 25 years for real estate, up to ten
years for working capital, and ten years for most other loans. The borrower repays the loan with monthly
principal and interest payments. 4

As with any loan, an SBA fixed-rate loan payment remains the same because the interest rate is constant.
Conversely, a variable-rate loan's payment amount can vary since the interest rate fluctuates. A lender
may establish an SBA loan with interest-only payments during a company's startup or expansion phase.
As a result, the business has time to generate income before making full loan payments. Most SBA loans
do not allow balloon payments.

The SBA charges the borrower a prepayment fee only if the loan has a maturity of 15 years or longer.
Business and personal assets secure every loan until the recovery value equals the loan amount or until
the borrower has pledged all assets as reasonably available. 5

Why Do Businesses Get Term Loans?

A term loan is usually meant for equipment, real estate, or working capital paid off between one and 25
years. A small business often uses the cash from a term loan to purchase fixed assets, such as equipment
or a new building for its production process. Some businesses borrow the cash they need to operate from
month to month. Many banks have established term-loan programs specifically to help companies in this
way.

What Are the Types of Term Loans?

Term loans come in several varieties, usually reflecting the lifespan of the loan. A short-term loan,
usually offered to firms that don't qualify for a line of credit, generally runs less than a year, though it
can also refer to a loan of up to 18 months or so. 3  An intermediate-term loan generally runs more than
one to three years and is paid in monthly installments from a company’s cash flow. A long-term loan
runs for three to 25 years, uses company assets as collateral, and requires monthly or quarterly payments
from profits or cash flow.

What Are the Common Attributes of Term Loans?

Term loans carry a fixed or variable interest rate, a monthly or quarterly repayment schedule, and a set
maturity date. If the loan is used to finance an asset purchase, the useful life of that asset can impact the
repayment schedule. The loan requires collateral and a rigorous approval process to reduce the risk of
default or failure to make payments. However, term loans generally carry no penalties if they are paid
off ahead of schedule.

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What Is a Loan Receivable?

Financial institutions account for loan receivables by recording the amounts paid out and owed to them in
the asset and debit accounts of their general ledger. This is a double entry system of accounting that
makes a creditor’s financial statements more accurate.

What Is a Loan Receivable?

A loan receivable is the amount of money owed from a debtor to a creditor (typically a bank or credit
union). It is recorded as a “loan receivable” in the creditor’s books.

How Do You Record a Loan Receivable in Accounting?

Like most businesses, a bank would use what is called a “Double Entry” system of accounting for all its
transactions, including loan receivables. A double entry system requires a much more detailed
bookkeeping process, where every entry has an additional corresponding entry to a different account. For
every “debit”, a matching “credit” must be recorded, and vice-versa. The two totals for each must
balance, otherwise a mistake has been made.

A double entry system provides better accuracy (by detecting errors more quickly) and is more effective
in preventing fraud or mismanagement of funds.

Let’s give an example of how accounting for a loans receivable transaction would be recorded.
Let’s say you are a small business owner and you would like a $15000 loan to get your bike company off
the ground. You’ve done your due diligence, the bike industry is booming in your area, and you feel the
debt incurred will be a small risk. You expect moderate revenues in your first year but your business plan
shows steady growth.

You go to your local bank branch, fill out the loan form and answer some questions. The manager does
his analysis of your credentials and financials and approves the loan, with a repayment schedule in
monthly installments based upon a reasonable interest rate. You are required to pay the full loan back in
two years. You walk out of the bank with the money having been deposited directly into your checking
account.

The bank, or creditor, has to record this transaction properly so that it can be accounted for later, and for
the bank’s books to balance. The manager records the transaction into the bank’s general ledger as
follows:

 Debit Account. The $15,000 is debited under the header “Loans”. This means the amount is
deducted from the bank’s cash to pay the loan amount out to you.
 Credit Account. The amount is listed here under this liability account, showing that the amount
is to be paid back.
You, as head of the bike company, should also record this. Here is how you would process the $15,000:

 Debit Account. You would record this loan payment to the company’s checking account. This
increases your cash balance on your balance sheet, and how much you have available to spend.
As such, sometimes a ‘debit’ account is referred to as a ‘cash’ account.
 Credit Account. Now you have a liability and it needs to be recorded here. Under “loan”, you
would record the $15,000 principal. You also need to include any bank fees associated with it.
Why do two bookkeeping steps need to be included here? Because this money has to be paid back. If you
do an entry that only shows $15,000 coming in but doesn’t account for the fact that it must be paid back
out eventually, your books will look a lot better than they are. The books also won’t balance.

Is a Loan Payment an Expense?

Partially. Only the interest portion on a loan payment is considered to be an expense. The principal paid is
a reduction of a company’s “loans payable”, and will be reported by management as cash outflow on the
Statement of Cash Flow.

Is a Loan an Asset?

A loan is an asset but consider that for reporting purposes, that loan is also going to be listed separately as
a liability.

Take that bank loan for the bicycle business. The company borrowed $15,000 and now owes $15,000
(plus a possible bank fee, and interest). Let’s say that $15,000 was used to buy a machine to make the
pedals for the bikes. That machine is part of your company’s resources, an asset that the value of such
should be noted. In fact, it will still be an asset long after the loan is paid off, but consider that its value
will depreciate too as each year goes by. The financial reports each year should reflect that.
What Is the Difference Between Loan Payable and Loan Receivable?

The difference between a loan payable and loan receivable is that one is a liability to a company and one
is an asset.

Loans Payable

This is a liability account. A company may owe (have a loan from) money to the bank, or even another
business at any time during the company’s history. This ‘note’ can also include lines of credit. Those
figures should be included here.

Loans Receivable

This is an asset account. If you are the company loaning the money, then the “Loans Receivable” lists the
exact amounts of money that is due from your borrowers. This does not include money paid, it is only the
amounts that are expected to be paid.