> 1) Bob has money, which he lends to Dave. Dave has possession but it's still Bob's money. That's not the way a loan is structured legally. Legally, a loan is

> 1) Bob has money, which he lends to Dave. Dave has possession but it's still Bob's money. That's not the way a loan is structured legally. Legally, a loan is a bargained-for exchange (a contract) in which the lender gives the borrower money and the borrower promises to make payments according to a schedule. (Note: It can be more complicated than that.) When the borrower receives the money, it becomes his money. If the borrower doesn't make the payments, then the lender can sue for breach of contract or to foreclose on a security interest if there is one. > ... there's no contract or agreement outstanding that obligates him to do anything ... By default, a lender is entitled to receive the stream of payments specified in the loan contract and is not required to accept prepayment if he doesn't want to (e.g., if the lender is receiving interest at 10% and the current rate is 5%, the lender does not have to allow the borrower to pay the principal all at once). Prepayment rules can be modified by the loan contract terms (e.g., imposing a penalty for prepayment) or by statute (e.g., a state law requiring housing mortgages to allow prepayment without penalty after some amount of time).