The Importance of Bank Lending - Essay Example

The paper "The Importance of Bank Lending" is an outstanding example of an essay on finance and accounting. The importance of bank lending can never be overstated. Bank loans are essential to the economic growth of any country around the world. As bank loan provides the capital for various businesses to expand or those that never existed to start. It also meets the payrolls that keep many nations around the world working.  Then what is a bank loan?

In finance, a bank loan usually is a fixed term with given regular fixed repayment.  A bank loan is typically extended for a fixed term with a pre-agreed schedule of interest and capital repayments. Interest is normally payable on the initial sum borrowed, irrespective of the falling balance as repayments are performed. Compared to other borrowings from the bank such as bank overdraft, bank loan has a relatively lower rate of interest. Through loans likewise, a large sum of money can be borrowed as long as there is a pre-agreed schedule of interest and capital repayments.  A bank loan is supposed to be paid at the stated time, or the borrower of the loan faces risks.

A bank loan can also be defined as a sum of money borrowed by a business or customer from a bank, often particular purpose must be stated to be provided with the loan, such as an individual or a business may state that they need a loan to purchase a vehicle then using such basis the individual is provided with the loan after an agreed interest on the sum taken. The role of a bank loan is to offer the bank customer with the required funds to achieve the purpose of the loan and to give the bank interest income. Most bank lending is accepted on collateral in one way or another and hence protects the bank from risk in the case of loan default by the customer. It is also important to note that the interest to be charged on the loan is determined depending on the two things. One, the bank loan interest depends on the rate of interest the bank offers as dictated by the Federal Bank. Secondly, the determination of the amount of interest rate to a bank loan is on the amount borrowed and the payment period. There are several kinds of bank lending available to customers. The most common types are home loans given on both fixed and adjustable-rate, car loans on both new and used vehicles, credit cards, student loans, personal loans and business bank loans in several different forms.

The initial step in attaining a bank loan is by the customer of the bank accepting the terms that will be set on the loan then filling the loan application form. The application of the bank loan will include financial information, personal information, and questions about the purpose of the loan. After customer's, the application will go into underwriting, here the bank will decide on whether or not to loan the client and at what rate of interest given the period applied for. Many banks will analyze the customer's credit rating and offer a bank loan.