Man climbing a rope
Loan proceeds are funds disbursed by a lender, less any 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 spends it on expenses. Borrowers, under the terms of the loan agreement, must repay the loan according to the schedule discussed, such as 30 years for a mortgage. They may be entitled to benefits such as subsidized interest or early repayment without penalty, depending on the type of loan.
In one example, a student may borrow $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 loan proceeds of $9,800 USD, reflecting the subtraction from the original amount to cover fees. Proceeds can be directed to the financial aid office, which would use the funds to pay for tuition, fees, and related expenses. Any extra can be sent to the student.
Loan agreements should discuss any fees and expenses associated with originating the loan and will provide information about the actual proceeds of the loan. There may also be limitations on how the borrower can use the funds, especially if the loan is granted, backed, or subsidized by the government. Borrowers may be barred from some uses of small business loans, for example, or may be required to use government student loans specifically for school expenses. So they could use money to buy textbooks, but not books to read for pleasure.
Loan recipients can choose to cancel their loans before they are disbursed if they find they no longer need the loans or if they have another source of funding. Once the loan funds are sent, the borrower becomes responsible for the loan amount and the fees cannot be refunded. This is important 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 state when loan funds are due to arrive, and borrowers should be aware that it can take several days to clear a bank account and be available for use. For students, emergency loans may be available to provide a small amount of funds to cover an immediate need while awaiting student aid disbursement.