Bank loans are amounts of money given to debtors for a certain period and must be repaid with interest. If you don’t have money to buy a car, you can go to the bank to borrow some cash. You have to repay the money, usually on installment basis. The amount of the payment depends on the principal, interest, and loan period.
Debtors may be individuals or institutions. They use it for various purposes, including consumption, working capital, or investment. Loans can be short term or long term, depending on the needs of the debtor.
In some cases, banks require collateral, especially if the debtor is a commercial company. It is to reduce the risk when the debtor fails to repay the loan. The bank can sell the collateral to cover the amount of unpaid money back.
Households apply a loan for consumption. Cars and homes are expensive. Hence, they are more achievable through the loan.
Meanwhile, businesses typically use bank loans for working capital or investment. They can use bank loans to buy capital goods or build a plant. They expect such investment to generate future income, which can be used to repay loans. When the investments fail to generate enough money, repayment are at worse and the business can go bankrupt.
Bank loans are vital in the modern economy. Money has become an integral part of modern economic life. The money supply change in the economy through bank loans, which the process refers to the money creation.