What Are Loan Proceeds?
Loan proceeds are funds disbursed by a lender, less any origination and processing fees. These funds may 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 on the schedule discussed, such as 30 years for a mortgage. They may be eligible for benefits like subsidized interest or early repayment with no penalties, depending on the type of loan.
In an example, a student might apply for a loan of $10,000 United States Dollars (USD) to fund college expenses. The lender could approve the loan, with a 2% fee for origination and processing to disburse the funds and handle the loan. A disbursement would include loan proceeds of $9,800 USD, reflecting the subtraction from the original amount to cover the fees. Proceeds might be directed to the financial aid office, which would use the funds to pay tuition, fees, and related expenses. Any extra could be sent to the student.
Contracts for loans should discuss any fees and expenses associated with the loan origination, and will provide information about the actual loan proceeds. There may also be limitations on how the borrower can use the funds, especially if the loan is provided, backed, or subsidized by the government. Borrowers may be restricted from some uses of small business loans, for example, or could be asked to use government student loans for school-related expenses specifically. Thus, they could use money to buy textbooks, but not books to read for pleasure.
Recipients of loans can choose to cancel them before they are disbursed if they find they no longer need them or have another source of funding. Once the loan proceeds are sent out, the borrower becomes liable for the amount of the loan, and the fees cannot be refunded. This is important to consider, for borrowers thinking about whether they really need a loan. If they wait too long to cancel, they might need to repay origination and processing fees.
Time to disbursement can depend on the loan and the terms. The contract may discuss when the loan proceeds should arrive, and borrowers should be aware it may take several days for them to clear a bank account and become available for use. For students, emergency loans may be available to provide a small amount of funds that cover an immediate need while waiting for a disbursement of student aid.
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