Let us say, you have lots of money but you cannot decide on whether to invest it or simply just lend it to another person. A lender entails the interest payment and the return of the principal amount the person is lending out.
What is a Loan?
Oftentimes, a borrower should give a collateral to the lender of the money to make the loan secure. Banks normally demands for cash collateral or real estate collateral that is equivalent to 170% of the amount of the loan. Bear in mind that a responsible bank does not shell out loans because there is right enough amount of collateral.
The correct basis for loan granting is the borrower’s ability to prove that he will make use of the loan proceeds in an activity that will make enough income for loan payment. The lender, in order to ensure that he will get back his money, gives out loans whenever:
• The borrower has more than enough sustainable income to pay for the loan in addition to the interest, and/or
• The lender does not mind taking over or foreclosing on the collateral.
One should follow this practice to become a successful lender. Do not make the good collateral as a basis of lending money, except when you want the collateral at the loan amount that you gave. Ensure that you are aware that the collateral prices may go down together with time.
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