#r-404a

In  addition to establishing pricing mechanisms , banks also devote attention to the actual structuring of each loan as regards the time frame for payment. The purpose of the loan influences that the time frame. A loan made to a manufacturers so that he can buy raw material to meet a seasonal need usually is a short-term loan, generally unsecured; a loan made to a corporation so that it can make a major addition to its factory is a longer term credit. Wherever possible, the bank seeks a definite schedule of amortization; that is, of reduction of the principal through periodic payments. Installment loans have always been made on this basis, but the concept also can be applied to other credits. A schedule of amortization prevents as commercial loan from staying on the bank’s books indefinitely, and also contributes to liquidity for the bank.

Some loans are structured on the basis of a so-called balloon payment. In such cases the borrower makes a specified number of smaller, regular reductions to the loan’s principal and then makes a large final payment.

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