The financial encyclopedia uses cookies to improve your user experience. Find out more here!



 

 


 

Bank loan
 

 

A fixed amount lent by a bank to a customer for an agreed time and on specified terms. Contrast with a bank overdraft, which is a permit to overdraw on an account up to a stated limit.
Loans are made by banks as part of their mal business. Interest is payable by the borrower at a rate agreed at the time that the loan is negotiated. Where, in the case of business
customers, there are provisions for renewing the loan at the end of the period for which it was initially granted, there will usually be a clause in the agreement which allows for renegotiation of the interest rate.

The bank will generally require security for a loan, which may comprise such assets as title deeds, insurance insurance policies and bills of sale. It will normally be of greater face value than the amount of the loan and may need to be accompanied by a guarantee, in writing, from a third party. It is within the bank manager's discretion to decide on the security and, on occasion, a guarantee on its own will be accepted, where the guarantor is considered to be absolutely reliable.

In fairly recent years a new category of bank loan, known as a personal loan, has emerged. This is a relatively short-term loan to a specific person and in many instances no security is asked for - the bank manager relies on experience and a knowledge of the borrower. These loans tend to carry a higher interest rate than do secured commercial loans and the amount lent plus the total interest for the period is paid back in fixed, weekly or monthly, instalments.
The willingness of a bank to lend money. and the interest rate it will demand, depends on the current state of the economy and thc degree of governmental interference. The latter may be operated by directives to the banks generally or by the manipulation of special deposits. If banks are required to increase their deposits with the central bank then the consequent reduction in money available for lending may seriously curtail the number of new loans, and the fall in liquidity might result in the premature calling in of old loans, where no fixed date applies, or the reluctance to renew expiring credits.

 

Reference: The Penguin Business Dictionary, 3rd edt.