Money Lending Law and Its Different Legal Definition
Money Lending Law
Money lending is a process that helps people in need but in most of the times the borrowers end up in debt, even though there are several laws and regulations designed and reinforced to protect the borrowers. These rules and regulations are mandatory for the money lenders, traditional banks or other alternative lenders, to follow.
- There are several state laws that prohibit lending money by the people to the people at an interest rate that is in excess of the specific statutory maximum limit. This is called the "usury limit."
- On the other hand, traditional banks may have a separate set of rules to follow.
- In fact, the federal government has special laws for the national banks to follow, especially after the high inflation that the country witnessed in 1980.
- This rule allowed those banks that have the word ‘national’ or ‘N.A.’ in their name, as well as those savings banks that are federally commissioned to ignore state statutory limits.
- They are allowed to peg their rate of interest at a few numbers of points higher than the discount rate fixed by the Federal Reserve.
- In addition to that, all other specially chartered organizations such as the small loan companies like Liberty Lending, as well as the installment plan sellers such as the car financing companies may also follow their own set of rules.
- The Truth in Lending Act, therefore, came into existence. This is ideally a federal law.
- This law requires all terms and conditions in any typical consumer credit transactions are fully and clearly explained to the consumer before the loan is finally granted.
- The Act also entails that all advertisements for the loan products apart from the statements made by the salesperson or clerk of any financial institutions trying to make a sale of a loan product.
The Federal Truth in Lending Act guarantees your "right of rescission," which entitles you to cancel a credit transaction within three clear business days in case you have applied for a personal loan for which you have put your home as collateral.
About the loans
There are lots of laws that describe the types and characteristics of loans apart from the most common type that you know: business loan and personal loans.
Typically, businesses are financed, either by debit or equity, but in most cases, these are financed by both.
- Equity is typically the capital paid to the business by the owner, and/or other investors who are offered shares for the business in return. The money can only be recovered by selling a business or shares. In such situations, the investors usually face the risk for the total of the investment made by them.
- Debt, on the other hand, is based on the specific contractual arrangements. This agreement entails both repayments of the principal amount borrowed, as well as the payment of interest as specified. However, there may be a few other types of debt that may not carry any interest such as a trade credit wherein the borrower has typically 90 days to repay the entire bill.
As for the others, all other forms of credit will represent loans in effect, especially those that involve transaction of money from one party to another. That means leasing of equipment or rental space may also be viewed as loans of equipment or real estate. In such cases, the lease payments or the rent represent the interest in these specific types of loan.
As for the records and keeping track of the loans, all these types of transactions are recorded on the books of the company as liabilities. These records indicate the Debt Equity Ratio or DTR of the company.
- The DTR is the figure arrived by dividing the liabilities by the equity of the company.
- The DTR actually indicates the degree to which it is "leveraged."
- The DTR is one of the measures that the money lenders use most frequently.
- The DTR helps the lenders to assess the financial strength of the company and make necessary and proper judgments on whether or not to lend and alternatively on how much to lend.
Typically, if there is a good and strong balance between debt and equity it will give the business the optimum flexibility that will help in several aspects such as:
- To achieve the goals for growth
- To speculate views to favor maximum leverage
- To accomplish the maximum possible returns for the stockholders.
This means that the traditional and old fashioned view about debt should be changed, and more progressive thoughts regarding DTR must be practiced by the businesses.
Characteristics of loan transactions
The lending law also characterizes the factors of borrowing transactions that involves time, costs, and risk factors, all these three are related closely.
- Time factor: This is called the term of the loan or the time within which you must repay the borrowed amount along with the predetermined rate of interest. This can be short term, long term, or intermediate forms of loans. However, revolving credit or perpetual debt does not have any fixed retirement dates.
- Cost factor: This is the interest and fees charged for the loan. The interest may be either fixed for the entire term of the loan or variable that are usually adjusted daily, annually, or at specific intervals such as three, five, and 10 years.
- Risk or security factor: Lending out money to a borrower, or in fact a stranger involves a fair bit of risk of the money not being recovered. In such cases, the borrowers may be asked to pledge a security or collateral to prevent such losses. These are secured loans such as mortgage and others, but for unsecured loans, the lenders only have to rely on the credit score of the borrower, and keep their fingers crossed.
Therefore, the money lending laws, as you may see, provide a fair bit of protection to the creditors, but it is mostly aimed for the protection of the borrowers. From time to time the government makes additions and amendments to it as well.