Loan proceeds are the funds disbursed by a lender, less origination and processing fees, and can be sent directly to the borrower or an authorized third party. Loan contracts must discuss fees, expenses, and limitations on how the borrower can use the funds. Disbursement time may depend on the loan and terms.
Loan proceeds are funds disbursed by a lender, less origination and processing fees. These funds can be sent directly to the borrower or to an authorized third party who takes custody of the money and applies it to expenses. Borrowers, under the terms of the loan agreement, must repay the loan within the term discussed, such as 30 years for a mortgage. They may be eligible for benefits such as subsidized interest or penalty-free early repayment, depending on the type of loan.
In one example, a student could apply for a loan of $10,000 United States Dollars (USD) to finance college expenses. The lender may approve the loan, with a 2% origination and processing fee to disburse the funds and service the loan. A disbursement would include a loan of $9,800 USD, reflecting the subtraction of the original amount to cover fees. Proceeds may be directed to the financial aid office, which would use the funds to pay tuition, fees, and related expenses. Any extras could be sent to the student.
Loan contracts must discuss the fees and expenses associated with loan origination, and will provide information on actual loan proceeds. There may also be limitations on how the borrower can use the funds, especially if the government provides, backs, or subsidizes the loan. Borrowers may be restricted from some uses of small business loans, for example, or may be required to specifically use government student loans for school-related expenses. Therefore, they could use money to buy textbooks, but not books to read for pleasure.
Loan recipients may choose to cancel their loans before disbursing them if they discover they are no longer needed or have another source of financing. Once the loan funds are sent, the borrower becomes responsible for the loan amount and fees cannot be refunded. This is important to keep in mind for borrowers wondering if they really need a loan. If they wait too long to cancel, they may have to pay origination and processing fees.
Disbursement time may depend on the loan and terms. The contract may discuss when loan proceeds should arrive, and borrowers should be aware that it may take several days for a bank account to settle and become available for use. For students, emergency loans may be available to provide a small amount of funds to cover an immediate need while you wait for student aid to be disbursed.
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