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Long-term Bank Loan

DefinitionA type of loan that has an extended time period

for repayment usually lasting between threeand 30 years.Car loans and home mortgages are

example of long-term loans.

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Characteristics

Time to Maturitydescribes the length of the loan contract

Repayment Schedule payments maybe required at the end of thecontract usually on a monthly or semi-annual basis. It will repaid littleby little until it is completely retired.

Interest interest is the cost of borrowing money. the interest ratecharged to cover operating costs, administrative costs and anacceptable rate of return.

Security assets pledged as security against loan loss are known ascollateral. For example, borrower puts other assets, including cashaside as collateral.

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Advantages Competitive Interest Rates - Individual and commercial

bank loans typically offer competitive market interest ratesand other reasonable repayment terms when compared

with non-traditional lender offers.

Bank Loans Are Always Available - Bank loans shouldalways be available since institutions must keep theirdepositors' money "working" and earning more interestthan the bank is paying on deposits.

Better Banking Relationship and Terms - For borrowerswho meet lending criteria, bank loans cost less than otherfinancing sources, offer liberal repayment terms andenhance an overall good relationship with one's financialinstitution

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Disadvantages Possible Delay In Getting the Loan - Depending on a

borrower's immediate need for cash, the longer processingtime often required by busy bank personnel may result inan unacceptable delay.

Limitations - There are a number of limitations on thetransaction. Good credit is often required to borrowmoney, and there are stipulations on how the money can beused

Cash Flow- Borrowing too much money can lead todecreased cash flow and payments can even overtakeincome in some cases; this is why many loan payments arelimited to a certain percentage of a borrower's income.

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Cost

Long-term loans usually start at 25,000 and go uptoward 200,00. The more money you need, the morerigorous the approval process becomes.

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Implication

Possible delay in getting the loan.

Not everyone qualifies for a bank loan.

Application Best use to construction, major capital improvements, large capital

investments, such as machinery, working capital, purchases of

existing businesses.Term loans require collateral and a relatively rigorous approval

process but can help reduce risk by minimizing costs. Before deciding

to finance equipment, borrowers should be sure they can they make

full use of ownership-related benefits, such as depreciation, and

should compare the cost with that leasing.

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Mortgage

Definition

Mortgage represent notes payable that have ascollateral real assets and require periodic payments.

Mortgages can be issued to finance the acquisition ofassets, construction of plant and modernization offacilities. The bank will require that value of propertyexceed the mortgage on that property.

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Advantages-you can make substantial capital gain. This can be a

great way of realising capital growth over a longperiod

-commercial mortgages are not subject to rentalfluctuations of residential properties giving you amore stable business planning environment

-tax deductible interest payments. Commercial

mortgage interest payments are taxdeductible.This can contribute to reducing yourbusiness' annual tax overheads

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Disadvantages you need a decent sized deposit. This represents money

which could be used in other business operations it can be harder to move your business if you own the

premises. With property rental, you can often negotiateending your rent agreement or find another business totake up your tenancy

if you have a variable rate mortgage, you can leave yourselfvulnerable to interest rate increases

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characteristicsA mortgage is an actual transfer of equitable interest in

immovable property(land building).

The transfer is of a specific moveable property forobtaining loan.

Since the mortgage is a contract,it cannot be carriedout by a minor mortgagor(borrowed).

The mortgage documents must be registered.

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Application Mortgage loans are usually entered into by home

buyers without enough cash on hand to purchase thehome. They are also used to borrow cash from a bankfor other projects using their house as collateral.

Types of loans are characterized by their term dates(usually from 5 to 30 years, some institutions now offerloans up to 50 year terms), interest rates (these may befixed or variable), and the amount of payments perperiod

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Implication and cost Large upfront cost

cost of interest

When you get a mortgage, you are charged an interest rate this is the rate which the lender charges you for usingtheir money to buy a home. It determines how much your

monthly payments will be. Generally speaking, the higherthe interest rate, the higher your monthly payment.

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