lAND CREDIT AND LAND CREDIT INSTITUTIONS. Credit accorded on real estate security is short term if the period is nine years or under, and long term if it is 10 years or over. In the United States, however, long term is understood to begin after five years. Usually the principle of short-term loans is payable in lump at the end of the period, but the principal of long-term loans is reducible to final extinction by partial payments at stated intervals during the period. There are two methods for determining the amount of each of such payments, and also two ways of using them for the reduction and extinction of the debt. The amount may be determined by divid ing the principal into equal parts by the num ber of years, or by splitting it into unequal parts and leaving the larger ones to the latter years so that the partial payments, with interest included, may be as nearly even as possible. Each payment is represented by a promissory note drawing interest from date of the loan. This is not an infrequent practice for 10-year loans, and is known as payment by instalments.
But the common method of computation is to divide the principal by the present value, at interest compounded at the given rate, of a payment of one dollar at the end of each year for the period of the loan. To illustrate, the present value of a 20-year series of such one dollar payments at 5 per cent compound in terest is $12.46221 —a figure that divides 1,000, for instance, into 8024 equal parts. Hence, this would be about the annual sum that a bor rower would have to at the end of each year, in order to extinguish a $1,000 loan at 5 per cent interest within 20 years. If the per iod is 10 years, he must, by similar reasoning, pay $129.50, while if it is 50 years he must pay $54.77 annually. That is to say, the longer the period the smaller becomes the borrower's annual payment, so that if the period is 81 years it is $50.97, or only a few cents more than the interest alone on the original principal. The borrower's payments determined by this method are called atemtities, and the paying off a loan by such annuities is called amortization.
A variation of this method and process Is to require the annuities to be paid at the begin ning instead of at the end of each year, and to calculate them accordingly. On a 20-year $1,000 loan at 5 per cent interest the annuity would then be $77.94. But inasmuch as the first annuity is deducted from the face of the loan, the borrower would actually get only $922.06. So if he wished the full $1,000 he would have to borrow $1,064.53 and pay a larger annuity. When pay ments are semi-annual, the interest dates are counted instead of the full years, and only one-half of the annual rate is taken; and so also with quarterly payments. Tables pub lished in various languages give the rates by which the annuity can be computed for amor tizing a loan of any amount, interest er period up to 100 years. Tables also show annuities in integral figures, as $25, $50 or $75, but inas much as they let the period take care of it self, they are objectionable because of the odd number of years and the fractional payments at the end.
The amortization of loans by annuities sup poses that out of each annuity there is taken the necessary part to cover interest on the loan and that the remainder is immediately applied to the reduction of the unpaid principal. The effect is the same as that of the instalment plan; and this is one way to use the borrower's payments for the gradual extinction of his debt. The other way is to reckon the principal as remaining at its original amount throughout the period and to place the payments, less in terest, into a sinking fund to be credited with interest at a given rate. If this rate is the same in every particular as that of the loan, there will of course be no difference between these two ways in actual results. But the bor
rower would be at a disadvantage if the sink ing fund's yield were lower than that of the loan; and such is often the case in Austrian savings banks, where this sinking-fund plan is much used and the borrower's payments are kept as a deposit account. Loans, whatever be the manner of payment, attain their land-credit character by the mortgage given by the bor rower to secure the performance of his con tract. The value of the mortgaged property must at least equal the amount of the loan, and the borrower's title to it should preferably be free and unencumbered. The value and title are determined to the lender's satisfaction. Titles may be guaranteed by companies formed for such purpose. In the United States 19 States have enacted laws, embodying features of the Torrens•system, for determining the title 'expeditiously; but in a number of the Western States the foreclosure laws, by reason of the borrower's homestead and other exemp tions and redemption rights, do not permit a speedy collection of the debt in the event of default.
Long-term reducible loans are manifestly not suitable for the individual investor. They are practicable only for institutional investors that can issue their own credit instruments against them and thereby effect the immediate recovery of their funds, despite the length of the loan period. These instruments may be either bonds, like a piontitsory net citodebectithits ilthe eatery of a certificate without a date subject to !The mewed by Mott etti ,Atiett? IDettii lutes, liftee ri6J6ited'-maturity or Ipecifie are retired periodically by lot, while' the protection is the prior lien of the debentures on all the institution's assets. The length of a loan depends, from the borrower's standpoint, upon the size of the annuity he wishes to pay; from the lender'S standpoint, it depends upon the terms and con ditions upon which money may be obtained. The institutions for according land credit are either public, semi-public or pnvate Pure pub lic institutions are those in which government supplies the working funds or 'the permanent fund, if any, and appoints the executive officers: • In form public institutions are bureaus; commissons or departments of government supported • by regular or occasional appropria-i lions, or incorporated bodies with capital or 'a foundation supplied by government, and with its guaranty, expressed or implied, on 'any credit instrument they may issue. They are not intended for the average landowner, and they, never extend credit without imposing coedi tions in regard to the person, the rule' being that wherever the cash or credit of govern ment is the borrower must be In actual need of such help and must swear to apply the loan to' the specified dbject for which it was granted. They were established for breaking up the feudal system, for dividing and alloting large estates, for enabling peasants or workmen to acquire small farms or homes, for promoting interior colonization or settling the public do main, for financing land reclamation, for relieve ing distress due to war or natural causes, or for meeting problems arising from compulsory mill: tary service, absenteeism of landlords, congested population or political emergencies. Govern: ment has sometimes subsidized private institu tions having such objects. Institutions in whicb private individuals may hold stock, or particil pacing in profit and loss, and join governmeqt in electing the directors and officers are semi public. Like pure public institutions, they have various forms, and the older ones were author ized by special laws.