Loans are generally represented by PROMISSORY NOTES (unconditional promises to pay). Loans may be for the long term (maturities greater than one year) or short term (less than one year) and may be secured (backed by collateral, ASSETS pledged to lessen the loan�s RISK) or unsecured (such as a signature loan). The cost of a loan is interest expense, determined in several ways: simple interest, discount interest, and compensating balance. With a simple-interest loan, the borrower receives proceeds equal to the face value of the loan; the loan�s principal and interest are paid at maturity. This is called a simple-interest loan because its effective interest rate is equal to the stated, nominal interest rate. Many consumer loans, such as automobile loans, are simple-interest loans. With a discount-interest loan, the lender deducts the interest expense from the loan�s proceeds, and thus the borrower receives less than face value. Because the interest expense is calculated on the face value of the loan, but the borrower receives less than the face value, the effective interest rate is higher than the nominal interest rate. A compensating balance is a minimum amount of funds that must be kept in a deposit account with the bank over the life of the loan. The presence of this compensating balance lessens the loan�s riskiness of the loan and increases its effective interest rate. For example, with a $100,000 loan that has a 10 percent compensating balance, the borrower has use of only $90,000, because $10,000 must remain on deposit at the lending institution. However, the interest expense is calculated on the face value of the loan�that is, on $100,000�which causes the effective interest rate to be higher than the loan�s nominal interest rate.