What is a loan?

Businesswoman talking on a cell phone

Sometimes called consumer loan takeover, loan takeover is a type of financial transaction in which loans issued by financial institutions are sold, sometimes at a discount, to new homeowners. Sometimes multiple loans are bundled into a single package and sold as bonds to investors. The idea is that the originator of the loans receives sufficient compensation from the acquisition to cover expenses and make a small profit, while the buyer or investor eventually earns a larger return as the loans are repaid according to the original terms. A loan purchase also transfers the risk involved with the loans to the new owner, who may incur losses if the debtors associated with the acquired loans default for some reason.

The idea of ​​buying a loan is very common in many business environments. Mortgages, auto loans, and even credit card debt are sometimes bundled into this form of acquisition and offered to investors as a means of benefiting from the returns earned on these financial debt instruments for years to come. For investors participating in the purchase of a loan, the idea is often to create ongoing income streams that eventually cover the full amount paid for the bundled loans, while also providing income from the interest that the borrower pays along with the principal. Since loans are often purchased at a small discount to the actual remaining balance owed at the time of purchase, this only helps to increase the returns the investor eventually earns from the venture.

Purchasing a loan is also beneficial to the institution that originally provided the loan. This is because the lender does not have to wait for the loan to be repaid as per the terms to recoup the full investment. Often, the purchase of the loan is made at a price slightly below the face value of the loan and the projected amount of interest that is due at the time of purchase. The lender has the benefit of receiving the lump sum invested in the loan sooner, usually makes a small amount back on the actual costs associated with the loan itself, and is free to use these funds to underwrite additional loans that generate additional income. Best of all, the lender no longer runs the risk of default on loans that are sold to investors.

See also  What is the difference between saving and accumulating money?

In many nations, it is not uncommon for financial institutions to use the loan purchase model with private and commercial mortgages, auto loans, and other types of lending activity. For the debtors themselves, the sale may mean little change, other than the need to remit monthly installments to a different entity with a different remittance address. Typically, the actual terms of the loan do not change, which means that the borrower still pays the same interest rate, has the same repayment schedule, and is subject to the same rights and responsibilities originally contracted.

Leave a Comment