Chapter 6 Accounting for Loans Department Ibrahim Sammour

Loan Definition: "Loan" is a type of debt. All material things can be lent; this article, however, focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower

Loan The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan

Loan Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding, bank loans and credit are one way to increase the money supply. Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money.

Types of loans : 1- Secured : 2- Unsecured :

Types of loans : 1- Secured : A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property.

Secured loans The financial institution, however, is given security (a lien on the title to the house) until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

Secured loans In some Instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect

Secured loans. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

Secured loans A type of loan especially used in limited partnership agreements is the recourse note. A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk.

Unsecured loans Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages:

Unsecured loans 1. Credit card debt" or Credit card bills are meant to be repaid within a month; when they is not a balance to be pay, then it is considered debt, and the consumer is charged interest by the company issuing the card. 2. personal loans. 3. a Bank overdrafts when a customer withdraws more money than is in their bank account, the money owed to the bank is called a bank overdraft. 4. Credit facilities or lines of credit.

Unsecured loans 5. "Corporate bond" is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)

Unsecured loans : Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies. Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not lit in cither category.

Unsecured loans : The interest rates applicable to these different forms may vary depending on the lender, the borrower. These may or may not be regulated by law.

Financial transactions: We can also divide the types of loans according to period as following: Short-term Loans Long-term loans.

These loans are commonly set for more than three years. Most are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow.

Short-term Loans These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals' salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan.

Short-term Loans What do banks look for when making decisions about term loans? Will, the "five C's" continue to be of utmost importance?

five C's 1. Character 2. Credit capacity 3. Collateral 4. Capital 5. Conditions/ Comfort/confidence with the business plan

Character Character: How have you managed other loans (business and personal)? What is your business experience?

Credit capacity Credit capacity: The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.

Collateral Collateral: This is the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.

Capital What assets do you own that can be quickly turned into cash it necessary? The bank wants to know what you own outside of the business-bonds, stocks, apartment buildings- that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. Or, as one astute businessman puts it, "Ranks like to lend to people who already have money." You will most likely have to add a personal guarantee to all of that, too.

Conditions/ Comfort/confidence Conditions/ Comfort/confidence with the business plan, flow accurate are the revenue and expense projections? Expect the bank to make a detailed judgment. What is the condition of the economy and the industry — hot, warm or cold?

Functions of Loans department 1. Studying loans applications, and determine the Amount, know the purpose of the loan; studying the customer capacity of repaying, and decide the kind and amount of collateral.

Functions of Loans department 2. Gathering information about customers, to follow up their capacity of repaying, and make notes for them. 3. Monitoring and following up the use of the loan, and was it spent as in the application.

Functions of Loans department 4. Taking care of the collaterals, and determining the bad debts for the customers who have loans.

Financial Transactions First: Loans without collaterals (Overdraft ):

Financial Transactions - When making the Loan Loans *** treasury *** Commission *** (Amount * Commission rate) Interest *** (Amount* Interest* Months OR Days)

Financial Transactions When repaying: Treasury or Current Account *** Loans without collaterals ***

Second: Loans with Personal collaterals Loans with personal collaterals *** Treasury or Current account *** Commission *** Interest *** Expenses (if found) ***

Second: Loans with Personal collaterals At the maturity date, may repay or not: A- If repaid: Treasury or Current account *** Loans with personal collaterals ***

Second: Loans with Personal collaterals B- If not repaid : If the customer did not pay at the maturity date, the bank will ask the Guarantor: Guarantor * * * Loans ***

Second: Loans with Personal collaterals Collecting the Loan amount from the - Guarantor Treasury or Current account *** Guarantor ***

Third: Loans with Notes or securities as collaterals Before making the loan, it should deposit the collaterals with regular entry: Commercial - financial papers * * * Depositors of Com. \Fin.papers *** (Deposit with the nominal value)

Third: Loans with Notes or securities as collaterals Give loan to the customer which usually is less than the collaterals: Loans (with Cam.\ Fin. Papers collaterals) *** Treasury *** Interest *** Commission *** Expenses (If found) ***

Third: Loans with Notes or securities as collaterals At the maturity date, will the Borrower repay or not for the loan amount?: A- When repaying at the maturity date: Treasury or Current account *** Loans ***

Third: Loans with Notes or securities as collaterals Council the regular entry (Giving collaterals back to its depositors) Depositors of Fin.-Com. Papers *** Fin. - Com. Papers ***

Third: Loans with Notes or securities as collaterals B- If the customer did not repay the loan amount, the bank will sell the securities or collect the commercial papers, then the bank will repay the loan alter deducting any extra expenses. A- Sell the securities or Collect the Notes: Treasury *** Sold Fin\papers or collect Com. Papers ***

Third: Loans with Notes or securities as collaterals B- Repayment of the loan: Sold Fin papers or collect Com. Papers * * * Collecting or sold expenses * * * Loans with securities collaterals * * * Credit current account (The rest if found) ***

Third: Loans with Notes or securities as collaterals But if the collected amount is not enough for repayment, that means the loan will repay partial amount and the rest will remain unpaid. Council the regular entry: Depositors of Fin.\ Com. Papers *** Fin. Com. Papers ***

Forth: Loans with tangible Collaterals: 1- Provide the collaterals: Tangible collaterals *** Depositors of tangible collaterals ***

Forth: Loans with tangible Collaterals: 2-Make the loan to the customer: Loans *** Treasury *** Interest *** Commission *** Expenses ***

Financial Transactions If paid some expenses on the tangible collaterals like transferring, storing...etc. A- Paying expenses: Expenses (transferring, storing) *** Treasury ***

Financial Transactions B-Record theses expenses on the loan: Loans with tangible *** Expenses * * *

Financial Transactions 3- At the maturity date, may the customer will repay or not: A- If the customer repay: Treasury or current account * * * Loans or credit cit. Ace. With, tangible ***

Financial Transactions Then, counseling the regular entry: Depositors of tangible collaterals *** Tangible collaterals ***

Financial Transactions B- If the customer did not repay at the maturity date the bank will sell the tangible collaterals: A- Selling the collaterals: treasury *** Sold tangible collaterals ***

Financial Transactions B-Repaying the loan, after deducting the sells expenses: Sold tangible collaterals * * * Expenses or commission of selling *** Loans with tangible collaterals *** Credit current ace. (if there) *** If the amount of selling is not enough to repay the loan, then the balance loan will still debit.

Example

These transactions occurred at the AI- Quds Bank in Loans without collaterals (Overdraft 20000$ (, commission 1%, interest 10%, for one year, paid amount of 5000$ in cash.

Example 2. Loans with Personal collaterals 30000$, commission 1%, interest 10%, for one year, the customer paid amount of 10000$ in cash. And did not repay the rest of Loan, so the bank asked the Guarantor and withdrawn the amount from current account.

Example 3. Loans with Commercial papers 60000$, the nominal value of this papers are $, the customer paid 40000$ before the end of time, commission 1%, interest 10%.

Example 4. Loans with financial papers 30000$ the nominal value of this papers are 50000$, At the maturity date the customer did not paid the amount of Loan, the bank sell the financial papers with amount $, and deposited the rest of amount in the current account of the current account.

Example 5. Loans with tangible collaterals 40000$,commission 1%, interest 10%,the cost of the stock $, the bank paid 500$ as Expenses transferring, 1500$ Expenses storing.

Example 6. the bank sold building as tangible collaterals loan with 50000$, the amount of the sell was 65000$, the nominal value of the building 80000$, and deposited the rest of amount in the current account of the current account.

Example Required: Recording the central journal entries.

End of Chapter 6