ABSTRACT
The most common mechanism for obtaining the use of a substantial sum of money for a defined period of time is to rent the use of the money by paying a premium called interest. The money is said to be borrowed. The vehicle for such a transaction is a loan. The typical source of loans for both personal and business use is a commercial bank. A contract is signed between the lender of funds and the borrower setting forth the terms of repayment and interest. Such contracts are often called promissory notes. The agency's balance sheet will reflect the loan as a note payable. The terms of the loan may call for regular monthly or quarterly payments until interest and principal are fully paid, or there may be smaller initial payments and a larger “balloon” payment later in the life of the loan. Interest may be compounded daily, monthly, or annually according to the agreement between lender and borrower. There may be added penalties for late payments and there may or may not be penalties for early payment.
