Monday, March 23, 2015

Loans are a resource transfer which the creditor provides to the borrower with a predetermined or open goal. A service which the borrower equalizes through interest over the duration of the loan according to the specified conditions provided in the contract

The applications are manifold - bound or unbound - it could be directed to maintain economic conditions, improve quality or quantity, could be for private purposes, entrepreneurial (micro-level) or related to macroeconomics. Depending on the borrowers legal status there are different forms of credit: in the context of retail credit there are multiple arrangements,  from a simple mortgage to government bounds issued as state credit.

Loans can be differentiated as producer and consumer loans, both can be viewed as an intertemporal decisions. Consumer loans are a temporal reallocation of consumption.

Credit operations can be viewed as a reallocation of consumption in time. The borrower gets to a present consumption opportunity that they could have not reached by their own resources and instead waives a given amount of future consumption since interest payment decreases their future spendable income. In contrast the creditor waives their current spending since they cannot use the income transferred to the borrower. The creditor does this in hope for a larger available income in the future since they can use the interests deriving from granting the credit although when estimating real income inflation has to be taken into account. This mechanism necessitates the existence of savings and the difference between impatience parameters.

Producer loans are directed at producing activities so interest expenses can be payed by the increased profit from producing. If the produced profit is insufficient indebtedness becomes a real danger.


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