Components of a Loan
Principal: This is the original amount of money that is being borrowed. Loan Term: The amount of time that the borrower has to repay the loan. Interest Rate: The rate at which the amount of money owed increases, usually expressed in terms of an annual percentage rate (APR).
The following details and characteristics will be presented for each loan: The loan amount, amortization schedule (if applicable), its interest rate, and any fees (either ongoing or one-time disbursement expenses, etc.). The loan maturity date, which means the date upon which the loan amount is due in full.
Elements of loan structure include loan-to-value (LTV), interest rate, amortization period, and collateral security requirements. Financial services firms generally have credit policies that support their relationship teams in structuring loans for prospective borrowers.
For example, a company's financials show $1 million in loans due over 12 months at a 4.5% interest rate. The debt due in one year is equivalent to $1 million at an interest rate of 6.5%. As a result, the organization's debt structure shows total debt of $2 million, with 50% short-term debt and 50% long-term debt.
There are two major categories for federal debt: debt held by the public and intragovernmental holdings. The debt held by the public has increased by 121% since 2014. Intragovernmental holdings increased by 44% since 2014.
Example of Financial Structure
A simple example could be a company that finances its operations with 70% equity and 30% debt. This would mean that most of the capital comes from shareholders, and a smaller portion is borrowed from banks or other financial institutions.
Loan structure refers to the constituent parts of the loan, such as the purpose, amount, type, interest rate, repayment term, and repayment method. The structure also includes measures to mitigate risk, and may include requirements for a guarantor or other covenants.
Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don't actually pay any money toward the principal loan amount at each monthly payment cycle. However, you will have to pay back the full principal amount at the end of the loan's life cycle.
The deal structuring process involves three stages: design, negotiation, and drawdown and monitoring. The purpose of deal structuring is to mitigate credit risk and minimise potential credit losses by considering factors such as probability of default, loss given default, and exposure at default.
Finally, the contract for loaning money must be signed by the borrower and the lender in order to be made legally binding. 💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments.
The term debt structure refers to the duration and timing of principal and interest payments. The structure typically refers to characteristics such as the maturity dates, the principal repayment terms, and the provisions for prepaying the loan.
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
The APR is the most important thing to compare when shopping for a loan. It takes into account the interest rate, points, mortgage broker fees, and other charges, expressed as a yearly rate. Generally, the lower the APR, the lower the cost of your loan.
This is an upfront fee charged by the lender to cover the costs of processing and originating the loan. It typically includes administrative expenses, credit checks, underwriting, and other initial processes.
Credit Criteria
Usually, a minimum credit score of 550 or higher is required to qualify for a hard money loan. However, some lenders may be more lenient and even provide financing to borrowers with a score as low as 500.
Private credit funds are typically structured as limited partnerships or limited liability companies managed by a general partner and/or manager who sources and vets potential investments and has the discretion to make investments for the fund.
Here are the common types of prepayment penalties you might encounter: Fixed Penalty: This is a flat fee or percentage applied if you repay your loan early, as is the case with Yieldi's 3% penalty if paid before 6 months. The penalty amount remains the same regardless of when within that period the loan is paid off.
Capital structure refers to the mix of debt, equity, and hybrid securities that a business uses to finance its operations and growth. Debt includes loans and bonds that require repayment, while equity involves raising funds through selling shares, giving investors ownership stakes.
Key Takeaways. Financial structure refers to the mix of debt and equity that a company uses to finance its operations. It can also be known as capital structure. Private and public companies use the same framework for developing their financial structure but there are several differences between the two.
The most common Structured Finance products are mortgage-backed securities (MBS) and asset-backed securities (ABS) for auto loans, home equity loans, student loans, and credit card receivables.
Generally, a good debt ratio for a business is around 1 to 1.5. However, the debt-to-equity ratio can vary significantly based on the business's growth stage and industry sector. For example, newer and expanding companies often utilise debt to drive growth.
You can calculate your company's capital structure by examining your debt-to-equity ratio, which you determine by dividing your liabilities (level of debt) by your total equity. The difference between your assets and liabilities determines your working capital or the amount of liquidity (current cash flow) you have.