chapter  4
24 Pages

Loan Basics

ByMichael Curley

Borrowing money is economically sound and prudent for many reasons. This chapter focuses on the reasons to borrow, elements of a loan, and time value of money. The first and most basic reason to borrow is unavailability of money: the borrower does not have enough money to pay for the project in cash. Nor is the borrower able to obtain money for free. No gifts are available from rich uncles; no grants are available from government agencies. The second reason to borrow concerns the purpose for which the money will be spent. The third reason for borrowing is fairness. Loans have three variables: Principal is the actual dollar amount of the loan. Interest is the cost of taking a loan. It is a function of the interest rate and the principal balance. There are four basic components that make up rates: inflation, risk, cost, and profit.