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What Is A 'Loan'?

A Loan is an agreement to let a borrower use a certain amount of resources for a period of time in exchange for a series of payments over a predefined period of time, equal to the original loan plus an interest rate.

Loans allow people immediate access to products that they couldn't purchase outright.

Loans are beneficial to the lender by benefiting from excess capital.

Josh Kaufman Explains 'Loans'

A Loan involves an agreement to let the borrower use a certain amount of resources for a certain period of time. In exchange, the borrower must pay the lender a series of payments over a predefined period of time, which is equal to the original loan plus a predefined interest rate.

In order to provide value via Loans, you must:

1. Have some amount of money to lend.
2. Find people who want to borrow that money.
3. Set an interest rate that compensates you adequately for the loan.
4. Estimate and protect against the possibility that the loan won’t be repaid.

Used responsibly, loans allow people to benefit from immediate access to products or services that would otherwise be too expensive to purchase outright.

Mortgages allow people to live in houses without having hundreds of thousands of dollars in the bank. Auto loans allow people to drive new vehicles in exchange for a monthly payment instead of a 100 percent down payment. Credit cards allow people to purchase goods and services immediately, then pay for them over the course of several months.

Loans are beneficial to the lender because they provide a way to benefit from excess capital. The addition of compound interest on top of the original loan (the “principle”) means that the lender will collect much more than the original loan—in the case of long-term loans like mortgages, often two to three times more.

After the loan is made, little additional work is required on the part of the lender aside from collecting payments—unless the borrower stops making payments.

Accordingly, the process of identifying how risky a particular loan is—a process called “underwriting”—is critically important for lenders, who often require some sort of asset as collateral to protect against the risks of a loan gone sour.

If the loan is not repaid, ownership of the collateral is transferred to the lender, then sold to recoup any funds lost in the transaction.

Questions About 'Loans'

• Does delivering value via lending assets to others make sense for your business idea?
• If so, what do you need to plan for to make it successful?

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"Money talks — but credit has an echo."

Bob Thaves, cartoonist and creator of "Frank and Ernest"

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https://personalmba.com/loan/

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