A hard loan is a foreign loan hard currency that must be repaid, the currency of a country with a reputation for political stability and economic strength. For example, a country classified as a developing country can borrow through hard loans named in U.S. dollars.
key takeaway
- A hard loan is when a foreign borrower accepts a loan denominated in hard currency, such as a reserve currency such as the U.S. dollar.
- Hard loans are often taken on by borrowers in developing countries because loans denominated in less stable currencies can be risky to lenders.
- Currency fluctuations can hurt borrowers of hard loans, as currency depreciation can make it more expensive to repay the loan.
How hard loans work
A hard loan is a loan between a lender and a borrower in two different countries, denominated in hard currency. Hard money refers to a monetary system or monetary policy reserve currency that is a widely accepted form of payment for goods and services around the world. It usually comes from a country with a strong economic and political position, and it may not be the borrower’s or lender’s currency. Hard loans greatly reduce the possible risk of loans denominated in less stable currencies.
However, there are some risks. If a borrower’s home currency falls sharply against the hard currency, it may be difficult for them to repay the loan. For example, if a Brazilian manufacturer gets a hard loan denominated in EUR and the EUR appreciates by 20% against the U.S. dollar over the life of the loan, it will effectively increase the loan interest rate by 20%, as well as the principal amount.
FX Considerations for Hard Loans
What qualifies a currency as hard money? It is expected to remain relatively stable in the short term, with high liquidity in the foreign exchange or foreign exchange market for foreign exchange (foreign exchange) – the market in which currencies are traded. The foreign exchange market is the largest and most liquid market in the world, with an average daily trading volume of trillions of dollars. It includes all the currencies in the world.
Foreign exchange transactions are conducted on a spot or forward basis and over the counter 24 hours a day. There is no centralized market for foreign exchange trading. The largest foreign exchange markets are located in major financial centers such as London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney.
Hard currency must have a stable value. The value of a currency is primarily based on economic fundamentals (GDP) such as gross domestic product (GDP ) and employment. The international strength of the U.S. dollar reflects the U.S. GDP, which ranked first in the world at $21.43 trillion as of the end of 2019. China and India have the world’s second and fifth largest GDP, respectively, but neither the Chinese yuan nor the Indian rupee is considered hard currencies. This helps explain how central bank policy and the stability of a country’s money supply affect exchange rates. The U.S. dollar is considered the world’s reserve currency, which is why 88% of international trade uses the U.S. dollar.
hard loan example
An example of a hard loan is a loan agreement between a Brazilian company and an Argentine bank in which the debt will be paid in U.S. dollars. This is a hard loan because the U.S. dollar is considered a hard currency and is more stable than the Brazilian Real ( BRL ) or the Argentine peso ( Apu ).
