Bank credit
Another function of the commercial banks is to provide credit, in the form of:
Overdrafts, where the customer can take out more money than he has in his account up to a certain limit agreed with the bank. He has to pay the money back whenever requested by the bank, and he also has to pay a relatively high rate of interest whenever he is overdrawn. For this reason, an overdraft is not the best option for long-term borrowing.
Banks make a profit by lending out money that has been deposited with them. People borrow money from banks for personal reasons (for instance, buying a house) or for business reasons (as starting a business). Only customers of the bank can get a loan from it because the bank has developed confidence in them as a sound financial investment. When granted, the loan is transferred to the customer’s account. A loan is a fixed amount of money that is at the customer’s disposal for a definite period of time. By the end of that time the money should be paid back.
A loan is cheaper if a large amount of money has to be borrowed over a longer period. The borrower must pay back the principal (the sum of money loaned) plus the interest on it. For business loans, the principal and the interest are due by the end of the term of the loan. Personal loans are more commonly paid back in equal parts (installments) during the full period of the loan.
When somebody applies for a loan, the bank always requests information regarding the purpose of the loan, the amount of money requested, as well as how and when the person or organization plans to pay back the principal and the interest. Since a business loan will be repaid from profits received in the business, the bank will try to estimate whether such profits are realistic or not. Personal loans are repaid out of personal income, so the bank will estimate whether the person’s income is sufficient to make the requested payment.
Some kind of security (usually personal property) will be required for personal loans. For business loans, some assets of the organization applying for a loan will act as security.
Besides these precautions, the bank will estimate whether the sum of money requested is adequate to achieve the purpose of the loan. Banks sometimes prefer to lend more money in order to make sure the project will work and so ensure repayment of the principal and the interest owed them. On the other hand, customers may request less money than they really need because they wish to make repayment easier. But lack of funds may lead to failure of the project, which the bank does not want.
Credit cards such as Visa or American Express are used to buy goods without needing to pay for them immediately. The customer receives a monthly statement and can either pay the entire amount in full (in which case no interest has to be paid) or in monthly installments (plus a fixed rate of interest).
Comprehension check.
Are the following statements true or false? Correct the false ones.
Money borrowed from banks for personal or business reasons.
Anyone can borrow money from a bank.
Bank loans are given to borrowers in cash from hand to hand.
Bank loans may be paid back whenever a borrower wants.
Both the principal and the interest of a loan must be repaid.
Security is seldom required when you borrow money from a bank.
Banks try to lend less money than borrowers request.
On the basis of what you have read make an oral summary of the text, using no more than 6 sentences.
Writing
Give your written statements. What kind of credit did each of these bank customers ask for?
Mr. and Mrs. Garrington sold their old house and bought a new one. However, as the new house was much larger and more expensive, they needed credit to pay the difference.
Jenny is a student whose income only just meets her expenses. In the winter months her heating and electricity bills are higher, and without credit she wouldn’t always be able to pay them.
Adam wants to buy a car, but only has enough savings to buy an old one. He would rather make use of his bank’s credit facilities to buy a newer model which hopefully wouldn’t need repairing so often.
Mrs. Brown has her own company. She travels a lot on business and likes to make use of her bank’s credit facilities to spread her expenses over a longer period.
Mr. Price has to pay the rent for his apartment on the first day of every month. However, he only receives his salary on the third day of the month. Without his bank’s credit facilities, he wouldn’t always be able to pay the rent.
Unit 8
