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Bank loan

bank loan

Significance

The significance of bank lending cannot be overstated. Bank loans drive the United States economy. Bank loans provide the capital for businesses to start and expand. Bank loans also meet the payrolls that keep America working. Home ownership would be almost nonexistent if it weren't for bank loans. Credit cards are a type of unsecured bank loan, and they help to drive retail sales. In 2008, the collapse of the sub-prime mortgage industry caused a massive constriction in bank lending, leading to a 40+ percent drop in the stock market and the onset of a recession.

Function

The function of a bank loan is to provide the bank customer with the necessary funds to accomplish the purpose of the loan, and to provide the bank interest income. Most bank loans are made on collateral in one way or another, and therefore protect the bank from loss in the case of loan default. The majority of bank loans will be for a set duration at a fixed rate of interest.

The first step in attaining

a bank loan is for a bank customer to fill out a loan application. The application will include personal information, financial information and questions about the purpose of the loan. Once submitted, the application will go into underwriting, where the bank will make a decision on whether or not to loan the money and at what rate of interest. The bank will investigate the customer's credit rating. If it is acceptable, the bank will issue the loan with an interest rate corresponding to the customer's credit score. The higher a customer's credit score, the lower the interest rate.

Some loans carry adjustable interest rates. These loans usually begin with a low, fixed rate of interest for a predetermined period of time. Once that period of time elapses, the adjustable rate interest provision of the loan is triggered. The rate of the loan adjusts up or down at predetermined intervals for the life of the loan, based upon the loan's underlying index. Adjustable rate loans almost always contain a maximum interest rate cap. Once that cap is reached, the interest rate cannot adjust any higher.

Category: Bank

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