A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
It is commonly believed that the borrower initially receives an amount of
money from the lender, to be paid back, usually but not always in regular installments, to the lender. In fact, the lender, whether a bank or credit card company, does not provide any cash to the borrower, but simply extends “credit.” [1] The lender does this by making a credit entry into the financial account (e.g. savings or checking) of the borrower; the value of this credit is equal to the amount of the loan. At the same time, the bank, for example, marks the loan as a liability in one part of their accounting system, and an asset in another part. The amount of the asset is equal to the amount of money the borrower promises to pay back, known as the principal.
In this way, the bank or other lending institution creates money, which the borrower is now free to “spend.”more...
It is commonly believed that the borrower initially receives an amount of
money from the lender, to be paid back, usually but not always in regular installments, to the lender. In fact, the lender, whether a bank or credit card company, does not provide any cash to the borrower, but simply extends “credit.” [1] The lender does this by making a credit entry into the financial account (e.g. savings or checking) of the borrower; the value of this credit is equal to the amount of the loan. At the same time, the bank, for example, marks the loan as a liability in one part of their accounting system, and an asset in another part. The amount of the asset is equal to the amount of money the borrower promises to pay back, known as the principal.In this way, the bank or other lending institution creates money, which the borrower is now free to “spend.”more...
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