Final answer:
In borrowing money, banks first verify the borrower's income and credit history, then may require a cosigner or collateral. The secondary loan market allows banks to sell the loans they issue, establishing the present value of long-term loans like mortgages.
Step-by-step explanation:
The two main components when borrowing money or lending are the assessment of the borrower's ability to repay the loan and the security measures taken to ensure repayment. Initially, banks require a prospective borrower to provide forms detailing sources of income, along with conducting a credit check on the individual's past borrowing history.
Additional security measures include requiring a cosigner, someone who legally pledges to repay the loan if the original borrower defaults, and collateral such as property or equipment that the bank can seize and sell if the loan is not repaid.
Beyond the initial loan agreement, the value of a loan as an asset to the bank is measured in the present by estimating what other parties in the market are willing to pay for it.
This happens in the secondary loan market, where loans issued and then sold by banks to other financial institutions, which then collect the loan payments, contrast with the primary loan market, where financial institutions make loans directly to borrowers.