Loans or Accountants

A loan is a financial instrument that allows people and organisations to lend and borrow money. The lender advances money to a borrower who is then expected to pay up the principal amount with interest at a future specified date. The principal amount is the sum that the lender gave to the borrower while the interest is the extra charge over and above the principal that the borrower is expected to pay to the lender. Interest is usually charged as a percentage of the principal amount. In most cases, financial institutions prefer lending to clients who already have an existing bank account since they can check their financial history with ease to determine the borrower's financial habits. With the help of an accountancy firm, you can explore your options.

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Who needs loans and why do they need loans?

There are three types of borrowers; individuals, organised groups and businesses. Individuals basically borrow money for day to day consumption, start businesses and to cater for such expenses as medical and educational bills. Organised groups are common in least developed areas where members guarantee each other's loans. Businesses or organisations borrow to either fund their expansion and growth or to boost their working capital.

Asset Based loans

In some cases, the lender may ask for a guarantee for the loan, usually in the form of an asset such a house, car, pieces of land, household goods and many more. This is referred to as asset backed financing since in the case of default, the lender can sell the asset to recover the amount lent. In other cases, if the borrower is purchasing an asset with the money, the asset automatically becomes the guarantee as in the case of car loans and mortgages. Asset based loans are the most secure loans since the lender has a fall back plan should the borrower default. Please note that the borrower can only use assets registered in his or her name for the process. Some lenders will allow properties registered in the names of other family members such as parents or spouses as long as the family members signs off on the plan.

Advantages of loans

Loans help people take care of expenses that are beyond their reach such as school fees and medical expenses. They also come in handy in emergency situations that require a large sum of money. Businesses can leverage on their borrowing power to grow and expand, acquire assets and to take care of recurrent expenditure when the business encounters financial hardships. For a business, a loan has a tax advantage since interest charged on loans is a deductible expense. This means that it reduces the level of net profit and therefore the level of tax charged.

Disadvantages of loans

There are people who take up loans that are beyond their financial ability. This results in financial stress which can lead to health issues of not checked. Failure to pay loans may result to loss of the asset used to guarantee the loan in the case of asset based loans. In addition default and late payments negatively affect the credit rating of the business or the individual which makes it harder to borrow in future. Poor credit scores also affect employment opportunities in future. The cost of borrowing can be prohibitively high in some cases adding on to the financial stress already being experienced by the borrower.

Alternatives to loans

Any accountancy firm will advise you to use up your savings as opposed to getting a loan given the higher cost of acquiring loans. For businesses, it is possible to raise capital in exchange for equity as opposed to loans. This can be raised from angel investors and venture capitalists. Businesses can also take advantage of convertible debt instruments that allow the lender to convert his or her loan into equity in the firm after a specified period of time. In addition, peer to peer lending has a lower cost of acquisition and may therefore be preferred to loans.