What Does Bank credit Mean
A loan is a financial operation where one entity grants another an amount of money in an account at its disposal, the second committing to return all the money taken, also paying interest for the use of that amount.
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Bank loans are granted by credit institutions , typically banks , through the conclusion of a contract by which the debt arises.
The concept of credit is often confused with that of a loan, the difference is that in credit the client has money at his disposal and only pays interest for the amount he uses, while in the loan, the client receives all the money and pay interest in full, regardless of how much you actually spend.
The origin of the money for the loans is in the deposits that others make in the same bank, to which the bank pays interest: it is in that difference between the rates offered for the deposits and the rates charged for the loans where it is much of the banking business.
As is known, banks represent a fundamental decision-making space in all countries of the world, and over time their operation has become more complex. Currently, except in particular economies where access to credit is very easy, granting a loan is a vote of confidence by the banking system to an individual or company .
In the case of individuals, one of the most frequent loans are those called mortgages (for the purchase or construction of houses), or those intended for the acquisition of vehicles or other useful goods for people , either for work or for other purposes.
See also: Line of credit
Credits for companies
In the case of organizations (companies, industries , etc.), bank loans logically represent much larger amounts of money , which are used to capitalize the organization: it is hoped that with this they can buy machines, hire employees or develop some new product that allows you to make a profit , even discounting the loan repayment and interest.
In both cases, the potential debtor must demonstrate solvency, offering guarantees or providing receipts and proof of their equity and income statement: that is why, in the case of companies, many times receiving a loan can mean future growth, in this way They make them attractive in other ways, for example their share price may go up.
Importance of bank credit for the economy
Bank credit is one of the market variables that has a great impact on the economy of the countries . In general, the Central Bank of a country and the so-called state banks set the levels of interest rates to which private lenders have to adapt (in cases where it is not directly regulated).
A strong restriction on access to credit, that is, a very high interest rate, which will involve a lot of economic effort for its repayment, will surely result in the contraction of sectors such as construction or the automotive or machinery industry, and with it, unemployment is likely to rise.
However, access to unlimited credit has its risks , since there are many precedents in countries where after a while it became impossible for many creditors to get their money back, generating a sudden outbreak of mistrust and with it, a precipitous drop in investment from one moment to the next.
However, bank loans are still a fundamental instrument for capitalization , both for individuals and companies. Great ventures throughout history would not have been possible without the kickoff given through one of these financial instruments.
Credit cooperatives aim to bring these injections of money closer to sectors with less possibilities of accessing bank credit, given the rigorous formal requirements that banking institutions usually have. For certain individuals or small and medium-sized companies, this may be the only viable financing alternative .