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			{{Short description\|Lending of money}}
	{{Refimprove\|date=October 2007}}
	{{~~otheruses~~}}		{{Other uses}}
			], Bulgaria, dated 1936.]]
	A '''loan''' is a type of ]. 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 ]s over time, between the ] and the ].
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			{{Banking \|terms}}
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			In ], a '''loan''' is the tender of ] by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a ] and is usually required to pay ] for the use of the money.

			The document evidencing the debt (e.g., a ]) will normally specify, among other things, the principal amount of money borrowed, the ] the lender is charging, and the date of repayment. A loan entails the reallocation of the subject ](s) for a period of time, between the ] and the ].
	The borrower initially does receive an amount of ] from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as ] on the ]. A loan is of the ] type if the amount paid periodically (for paying off and interest together) is fixed.

			The interest provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by ], which can also place the borrower under additional restrictions known as ]s. Although this article focuses on monetary loans, in practice, any material object might be lent.
	A borrower may be subject to certain restrictions known as ]s under the terms of the loan.

	Acting as a provider of loans is one of the ~~principal~~ ~~tasks~~ ~~for~~ ]s. For other institutions, issuing of ] contracts such as ] is a typical source of funding~~. Bank loans and credit are one way to increase the ]~~.		Acting as a provider of loans is one of the main activities of ]s such as ] and ] companies. For other institutions, issuing of debt contracts such as ] is a typical source of funding.

			==Types==
	Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money.
			{{Further\|Paperless loan}}

	==Types of loans==
	===Secured===		===Secured===
			{{See also\|Loan guarantee}}
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			A ] is a form of debt in which the borrower ] some asset (i.e., a car, a house) as ].

			A ] is a very common type of loan, used by many individuals to purchase residential or commercial property. The lender, usually a financial institution, is given security{{snd}} a ] on the title to the property{{snd}} until the mortgage is paid off in full. In the case of home loans, if the ] ] on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
	A ] is a loan in which the borrower ] some asset (e.g. a car or property) as ] for the loan.

			Similarly, a loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter{{snd}} often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. In a direct auto loan, a bank lends the money directly to a consumer. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer.
	A ] is a very common type of debt instrument, used by many individuals to purchase ]. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a ] on the title to the house — until the mortgage is paid off in full. If the borrower ] on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

			Other forms of secured loans include loans against securities – such as shares, mutual funds, bonds, etc. This particular instrument issues customers a line of credit based on the quality of the securities pledged. Gold loans are issued to customers after evaluating the quantity and quality of gold in the items pledged. Corporate entities can also take out secured lending by pledging the company's assets, including the company itself. The interest rates for secured loans are usually lower than those of unsecured loans. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate the quality of pledged collateral before sanctioning the loan.
	In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

			===Unsecured===
	A type of loan especially used in ] agreements is the ].
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			] are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:
			* ]s
			* ]
			* ] ]s
			* Credit facilities or lines of credit
			* ]s (may be secured or unsecured)
			* ]

			The ]s applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the ].
	A stock hedge loan is a special type of ] whereby the stock of a borrower is hedged by the lender against loss, using options or other ] strategies to reduce lender risk.{{Fact\|date=December 2007}}

			Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of ] are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.
	Examples of Secured Loans; ], ]s, ]

	===~~Unsecured~~===		===Demand===
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			Demand loans are short-term loans<ref name=Signoriello1991>{{Cite book
			\| title = Commercial Loan Practices and Operations
			\| year = 1991
			\| author = Signoriello, Vincent J.
			\| publisher = Bankers
			\| isbn = 978-1-55520-134-0
			}}</ref> that typically do not have fixed dates for repayment. Instead, demand loans carry a ], which varies according to the ] or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time.<ref name="IncorporatedEditors2008">{{cite book\|author1=CCH Incorporated\|title=Federal Estate & Gift Taxes: Code & Regulations (Including Related Income Tax Provisions), As of March 2008\|url=https://books.google.com/books?id=JJxcMf_zcDEC&pg=PA631\|date=April 2008\|publisher=CCH\|isbn=978-0-8080-1853-7\|pages=631–\|access-date=2020-11-18\|archive-date=2021-04-14\|archive-url=https://web.archive.org/web/20210414031440/https://books.google.com/books?id=JJxcMf_zcDEC&pg=PA631\|url-status=live}}</ref> Demand loans may be unsecured or secured.

			===Subsidized{{anchor\|Subsidized loan}}===
	]s are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages:
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
	*] debt
			A subsidized loan is a loan on which the interest is reduced by an explicit or hidden ]. In the context of college loans in the ], it refers to a loan on which no interest is accrued while a student remains enrolled in education.<ref> {{Webarchive\|url=https://web.archive.org/web/20120304173612/http://collegesavings.about.com/od/glossarydefinitions/g/subsidized-loan.htm \|date=2012-03-04 }} at '']''. Retrieved 2011-12-21.</ref>
	* personal loans
	* ] ]s
	* credit facilities or lines of credit
	* ]s

			===Concessional===
	The ]s applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the ].
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or a combination of both.<ref> {{Webarchive\|url=https://web.archive.org/web/20131031211300/http://stats.oecd.org/glossary/detail.asp?ID=5901 \|date=2013-10-31 }}, ], Retrieved on 5/5/2013</ref> Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an ] (sometimes called a ''perk'').

	==~~Abuses~~ ~~in lending~~==		==Target markets==
			Loans can also be categorized according to whether the debtor is an individual person (consumer) or a business.
	] is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorised, it could be considered a ].

			===Personal===
	] is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit card companies in some countries have been accused by consumer organisations of lending at usurious interest rates and making money out of frivolous "extra charges". <ref> ], ]</ref>
			{{See also\|Credit (finance)#Consumer credit}}
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			Common personal loans include ]s, car loans, home equity lines of credit, ]s, ]s, and ]. The ] of the borrower is a major component in underwriting and interest rates (]) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well.<ref>{{Cite news\|url=https://www.reuters.com/article/us-auto-loans-idUSBRE9240KQ20130305\|title=Average new-car loan a record 65 months in fourth quarter\|date=August 6, 2017\|work=Reuters\|access-date=2017-08-06\|archive-date=2017-08-06\|archive-url=https://web.archive.org/web/20170806181709/http://www.reuters.com/article/us-auto-loans-idUSBRE9240KQ20130305\|url-status=live}}</ref> A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders.

			===Commercial===
	Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or with an intent to defraud the lender.
			{{Main\|Business loan}}
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->
			Loans to businesses are similar to the above but also include ]s and ]s and government guaranteed loans Underwriting is not based upon credit score but rather ].

			==Loan payment==
	== United States taxes ==
			The most typical loan payment type is the fully ] payment in which each monthly rate has the same value over time.<ref>{{cite news \| url=https://www.washingtonpost.com/wp-dyn/content/article/2007/10/05/AR2007100501165.html \| newspaper=The Washington Post \| title=The Math Behind Your Home Loan \| first=Jack \| last=Guttentag \| date=October 6, 2007 \| access-date=May 11, 2010 \| archive-date=November 10, 2012 \| archive-url=https://web.archive.org/web/20121110190731/http://www.washingtonpost.com/wp-dyn/content/article/2007/10/05/AR2007100501165.html \| url-status=live }}</ref>

			The fixed monthly payment ''P'' for a loan of ''L'' for ''n'' months and a monthly interest rate ''c'' is:
	Most of the basic rules governing how loans are handled for tax purposes in the United States are uncodified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations — another set of rules that interpret the Internal Revenue Code).<ref>Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. 111 (2007).</ref> Yet such rules are universally accepted.<ref>''Id.''</ref>

			:<math>P = L \cdot \frac{c\,(1 + c)^n}{(1 + c)^n - 1}</math>
	1'''. A loan is not gross income to the borrower.'''<ref>''Id.''</ref> Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.<ref>''Id.'' ''See Commissioner v. Glenshaw Glass Co.'', 348 U.S. 426 (1955)(giving the three-prong standard for what is "income" for tax purposes: (1) accession to wealth, (2) clearly realized, (3) over which the taxpayer has complete dominion).</ref>

			For more information, see ].
	'''2. The lender may not deduct the amount of the loan.'''<ref>Donaldson, at 111.</ref> The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).<ref>''Id.''</ref> Deductions are not typically available when an outlay serves to create a new or different asset.<ref>''Id.''</ref>

			==Abuses in lending==
	'''3. The amount paid to satisfy the loan obligation is not deductible by the borrower.'''<ref>''Id.''</ref>
			] is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them; subprime mortgage-lending<ref>{{cite web \|url=https://money.cnn.com/2000/04/18/home_auto/q_lend/ \|title=Predators try to steal home \|date=18 Apr 2000 \|website=CNN Money \|access-date=7 Mar 2018 \|archive-date=8 March 2018 \|archive-url=https://web.archive.org/web/20180308041705/http://money.cnn.com/2000/04/18/home_auto/q_lend/ \|url-status=live }}</ref> and payday-lending<ref>{{cite news \|last1=Horsley \|first1=Scott \|last2=Arnold \|first2=Chris \|date=2 Jun 2016 \|title=New Rules To Ban Payday Lending 'Debt Traps' \|url=https://www.npr.org/sections/thetwo-way/2016/06/02/480329986/new-rules-to-ban-payday-lending-debt-traps \|work=] \|access-date=7 Mar 2018 \|archive-date=8 March 2018 \|archive-url=https://web.archive.org/web/20180308042507/https://www.npr.org/sections/thetwo-way/2016/06/02/480329986/new-rules-to-ban-payday-lending-debt-traps \|url-status=live }}</ref> are two examples, where the moneylender is not authorized or ], the lender could be considered a ].

			] is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures, the acceptable interest rate has varied, from no interest at all as in the ] prescript,<ref>{{bibleverse\|\|Exodus\|22:25}}</ref> to unlimited interest rates. Credit card companies in some countries have been accused by ]s of lending at usurious interest rates and making money out of frivolous "extra charges".<ref>{{cite news\|date=3 May 2007\|url-status=dead\|url=http://www.financialexpress.com/latest_full_story.php?content_id=163028\|title=Credit cardholders pay Rs 6,000 cr 'extra'\|archive-url=https://web.archive.org/web/20190120183520/https://www.financialexpress.com/\|archive-date=January 20, 2019\|work=The Financial Express (India)\|author=<!--Staff writer(s); no by-line.-->\|location=Chennai, India}} {{Webarchive\|url=https://web.archive.org/web/20190120093655/https://cornerstonesupport.com/usury-example/ \|date=2019-01-20 }}</ref>
	'''4. Repayment of the loan is not gross income to the lender.'''<ref>''Id.''</ref> In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.<ref>''Id.''</ref>

			Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay the loan.
	'''5. Interest paid to the lender is included in the lender’s gross income.'''<ref>''Id.''; 26 U.S.C. 61(a)(4)(2007).</ref> Interest paid represents compensation for the use of the lender’s money or property and thus represents profit or an accession to wealth to the lender.<ref>''Id.''</ref> Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest.<ref>''Id. at 112.''</ref>

			==United States taxes==
	'''6. Interest paid to the lender may be deductible by the borrower.'''<ref>''Id.''</ref> In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible.<ref>''Id.''</ref> The major exception here is interest paid on a home mortgage.<ref>''Id.''</ref>
			Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations{{snd}} another set of rules that interpret the Internal Revenue Code).<ref name="donaldson">Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007).</ref>{{rp\|111}}

			# A loan is not gross income to the borrower.<ref name="donaldson" />{{rp\|111}} Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.<ref name="donaldson" />{{rp\|111}}<ref>''See Commissioner v. Glenshaw Glass Co.'', 348 U.S. 426 (1955) (giving the three-prong standard for what is "income" for tax purposes: (1) accession to wealth, (2) clearly realized, (3) over which the taxpayer has complete dominion).</ref>
	==Income from discharge of indebtedness==
			# The lender may not deduct (from own gross income) the amount of the loan.<ref name="donaldson" />{{rp\|111}} The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment).<ref name="donaldson" />{{rp\|111}} Deductions are not typically available when an outlay serves to create a new or different asset.<ref name="donaldson" />{{rp\|111}}
			# The amount paid to satisfy the loan obligation is not deductible (from own gross income) by the borrower.<ref name="donaldson" />{{rp\|111}}
			# Repayment of the loan is not gross income to the lender.<ref name="donaldson" />{{rp\|111}} In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.<ref name="donaldson" />{{rp\|111}}
			# Interest paid to the lender is included in the lender's gross income.<ref name="donaldson" />{{rp\|111}}<ref>26 U.S.C. 61(a)(4)(2007).</ref> Interest paid represents compensation for the use of the lender's money or property and thus represents profit or an accession to wealth to the lender.<ref name="donaldson" />{{rp\|111}} Interest income can be attributed to lenders even if the lender does not charge a minimum amount of interest.<ref name="donaldson" />{{rp\|112}}
			# Interest paid to the lender may be deductible by the borrower.<ref name="donaldson" />{{rp\|111}} In general, interest paid in connection with the borrower's business activity is deductible, while interest paid on personal loans are not deductible.<ref name="donaldson" />{{rp\|111}} The major exception here is interest paid on a home mortgage.<ref name="donaldson" />{{rp\|111}}

			===Income from discharge of indebtedness===
	Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness. '''<ref>''Id.''; 26 U.S.C. 61(a)(12)(2007).</ref> Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The ] lists “Income from Discharge of Indebtedness” in Section 62(a)(12) as a source of ].
			Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.<ref name="donaldson" />{{rp\|111}}<ref>26 U.S.C. 61(a)(12)(2007).</ref> Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The ] lists "Income from Discharge of Indebtedness" in Section 61(a)(12) as a source of ].

	Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this ~~should be~~ treated the same way as if Y gave X $50,000.		Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this is treated the same way as if Y gave X $50,000.

	For a more detailed description of the ~~“discharge~~ of ~~indebtedness”~~, look at Section 108 (]) of the ].~~'''~~<ref>~~''Id.'';~~ 26 U.S.C. 108(2007).</ref>		For a more detailed description of the "discharge of indebtedness", look at Section 108 (]) of the ].<ref>26 U.S.C. 108(2007).</ref><ref>EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 {{Webarchive\|url=https://web.archive.org/web/20170710025011/https://www.wsj.com/articles/SB10001424127887324556304578120721147710286 \|date=2017-07-10 }}</ref>

	==See also==		==See also==
			<!-- Please respect alphabetical order -->
	* ], ], ]
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	* ], ], ], ]
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	* ], ], ]
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	* ] (a.k.a. ])		* ] (a.k.a. ])
			* ]
			* ], ], ]
			* ], ], ], ]
	* ]		* ]
			* ], ], ]
	* ], ], ]		* ], ], ]
	* ]		* ]
	* ]		* ]
	* ]		* ]
	* ] and the Exchange National Bank of Chicago - Innovation of instant loans
	* ]		* ]
	* ]		* ]
			*]
			* ]
	* ]		* ]
	* ]		* ]
	* ]		* ]
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			}}

			'''US specific:'''
			{{columns-list\|colwidth=35em\|
			* ]
			* ]
			* ]
			* ] and the Exchange National Bank of Chicago - Innovation of instant loans
			* ]
			* ]
			}}

	==References==		==References==
	{{Reflist}}		{{Reflist}}
			<!-- DO NOT ADD LINKS TO LENDERS. They will be removed. -->

			{{Debt}}
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			{{Authority control}}
	]

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Latest revision as of 21:48, 7 January 2025

Lending of money For other uses, see Loan (disambiguation).

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Terms

Types

Further information: Paperless loan

Secured

Unsecured

Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

Credit cards
Personal loans
Bank overdrafts
Credit facilities or lines of credit
Corporate bonds (may be secured or unsecured)
Peer-to-peer lending

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

Demand

Demand loans are short-term loans that typically do not have fixed dates for repayment. Instead, demand loans carry a floating interest rate, which varies according to the prime lending rate or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.

Subsidized

A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of college loans in the United States, it refers to a loan on which no interest is accrued while a student remains enrolled in education.

Concessional

A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or a combination of both. Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an employee benefit (sometimes called a perk).

Target markets

Loans can also be categorized according to whether the debtor is an individual person (consumer) or a business.

Personal

Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans, and payday loans. The credit score of the borrower is a major component in underwriting and interest rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders.

Commercial

Main article: Business loan

Loans to businesses are similar to the above but also include commercial mortgages and corporate bonds and government guaranteed loans Underwriting is not based upon credit score but rather credit rating.

Loan payment

The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time.

The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is:

P=L\cdot {\frac {c\,(1+c)^{n}}{(1+c)^{n}-1}}

For more information, see monthly amortized loan or mortgage payments.

Abuses in lending

Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them; subprime mortgage-lending and payday-lending are two examples, where the moneylender is not authorized or regulated, the lender could be considered a loan shark.

Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures, the acceptable interest rate has varied, from no interest at all as in the biblical prescript, to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges".

Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay the loan.

United States taxes

Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations – another set of rules that interpret the Internal Revenue Code).

A loan is not gross income to the borrower. Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth.
The lender may not deduct (from own gross income) the amount of the loan. The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment). Deductions are not typically available when an outlay serves to create a new or different asset.
The amount paid to satisfy the loan obligation is not deductible (from own gross income) by the borrower.
Repayment of the loan is not gross income to the lender. In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.
Interest paid to the lender is included in the lender's gross income. Interest paid represents compensation for the use of the lender's money or property and thus represents profit or an accession to wealth to the lender. Interest income can be attributed to lenders even if the lender does not charge a minimum amount of interest.
Interest paid to the lender may be deductible by the borrower. In general, interest paid in connection with the borrower's business activity is deductible, while interest paid on personal loans are not deductible. The major exception here is interest paid on a home mortgage.

Income from discharge of indebtedness

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists "Income from Discharge of Indebtedness" in Section 61(a)(12) as a source of gross income.

Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this is treated the same way as if Y gave X $50,000.

For a more detailed description of the "discharge of indebtedness", look at Section 108 (Cancellation-of-debt income) of the Internal Revenue Code.

References

Signoriello, Vincent J. (1991). Commercial Loan Practices and Operations. Bankers. ISBN 978-1-55520-134-0.
CCH Incorporated (April 2008). Federal Estate & Gift Taxes: Code & Regulations (Including Related Income Tax Provisions), As of March 2008. CCH. pp. 631–. ISBN 978-0-8080-1853-7. Archived from the original on 2021-04-14. Retrieved 2020-11-18.
Subsidized Loan - Definition and Overview Archived 2012-03-04 at the Wayback Machine at About.com. Retrieved 2011-12-21.
Concessional Loans, Glossary of Statistical Terms Archived 2013-10-31 at the Wayback Machine, oecd.org, Retrieved on 5/5/2013
"Average new-car loan a record 65 months in fourth quarter". Reuters. August 6, 2017. Archived from the original on 2017-08-06. Retrieved 2017-08-06.
Guttentag, Jack (October 6, 2007). "The Math Behind Your Home Loan". The Washington Post. Archived from the original on November 10, 2012. Retrieved May 11, 2010.
"Predators try to steal home". CNN Money. 18 Apr 2000. Archived from the original on 8 March 2018. Retrieved 7 Mar 2018.
Horsley, Scott; Arnold, Chris (2 Jun 2016). "New Rules To Ban Payday Lending 'Debt Traps'". National Public Radio. Archived from the original on 8 March 2018. Retrieved 7 Mar 2018.
Exodus 22:25
"Credit cardholders pay Rs 6,000 cr 'extra'". The Financial Express (India). Chennai, India. 3 May 2007. Archived from the original on January 20, 2019. Alt URL Archived 2019-01-20 at the Wayback Machine
^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed. (2007).
See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) (giving the three-prong standard for what is "income" for tax purposes: (1) accession to wealth, (2) clearly realized, (3) over which the taxpayer has complete dominion).
26 U.S.C. 61(a)(4)(2007).
26 U.S.C. 61(a)(12)(2007).
26 U.S.C. 108(2007).
EUGENE A. LUDWIG AND PAUL A. VOLCKER, 16 November 2012 Banks Need Long-Term Rainy Day Funds Archived 2017-07-10 at the Wayback Machine

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Latest revision as of 21:48, 7 January 2025

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United States taxes

Income from discharge of indebtedness

See also

References