A loan is when one entity (a bank, person, business etc.) lends money to another for repayment in the future. Loans can come in different forms depending on the term of the loan, the interest rate charged, the amount and other parameters.
The two parties agree on the parameters of a loan before any money or assets of another kind switch hands. Loans are important in the energy industry as they are often used to fund large projects. For example, a company will often have to get a loan before building a nuclear power plant or starting a new oil well.
Aspects of Loans
Loans have many different aspects such as:
- Principle Amount- The amount of money being borrowed.
- Lender- The institution that provides the funds for the loan.
- Debtor- The person or entity that borrows the money.
- Collateral- Assets that the lender can seize if a debtor fails to repay the loan.
- Interest- Predicated on the interest rate for the loan, it can be fixed or variable over time. The interest rate is applied to the principle amount of incrementally to each payment. It is the payment to the lender fro being able to borrow the money.
- Maturity- The date by when the loan must be paid back in full.
Types of Loans
There is a wide range of loans that exist:
- Term loan- This is a very standard loan to be paid back at a specific time.
- Revolving loan- Typically for short periods of time, a revolving loan is renewed after a set period of time, every year or so.
- Unsecured loan- The lender does not have any claim on the asset of a debtor (collateral) who fails to repay the loan within the terms of the loan.
- Secured loan- The lender has a claim on an asset of the debtor (the debtor posts collateral) if they fail to repay the loan within the terms of the loan.
- Personal loan- A loan taken out by an individual from a bank in order to make a large purchase such as a car. Personal loans are typically unsecured, for a fixed term with a payment schedule.
- Hard & soft loan- Is predicated on the conditions of the market, it takes into account the changes in the interest rate, inflation, fluctuations in currency value and the credit rating of the debtor which determines the level of risk in the loan.
- Soft loan- A loan with somewhat "loose" conditions, low or not interest, a long term of repayment or potentially no fixed term and it is not tied to market conditions.
- Convertible loan- Or convertible bond is an asset that can be converted into common stock shares in the company that issued the bond.
- Bank loan- A loan takeout from a bank or financial institution.
- Syndicated loan- A loan that is provided by a group of lending institutions, these are typically in very large amounts and lower risk as there is a larger pool of capital on the lending side in the case that the loan is not repaid within the terms.
- J.Black, N. Hashimzade, and G. Myles. (2009) "Loan." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-1830?rskey=vA0sFe&result=1, 2009 [Aug 20, 2016]
- Investopedia. "Loan." [Online], Available: http://www.investopedia.com/terms/l/loan.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186 [Aug 20, 2016].
- Some of these were found under loan, here:"A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017], the rest came as a result of writing different pages on loans.