A bank loan is a monetary loan received from a commercial lender. The loan may be either a car loan or a home loan. A bank loan must have a predetermined duration and an interest rate that is fixed or adjustable. Generating loans and charging interest is the very purpose of a modern bank.
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 however, the majority of bank loans will be for a set duration at a fixed rate of interest.
To get a bank loan one starts by filling out a loan application form. This includes personal information, financial information and questions about the purpose of the loan. The application goes through underwriting, where the bank will make a decision on whether or not to loan the money and at what rate of interest. The bank investigates the customer’s credit rating and if it is acceptable, the bank issues 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 changed.
Examples of Bank Loans.
There are many types of bank loans available. The most common types are car loans (both new and used), home loans (both fixed and adjustable rate), credit cards, student loans, business loans in several different forms, and personal loans.
- Loans made on collateral – such as car loans and home mortgages – have a security attached to the loan. For example, if a customer stops paying on his car loan, the bank will repossess the car to protect their interest. The car is then sold to recover the outstanding balance of the loan. The same thing happens when a home goes into foreclosure.
- Unsecured loans have no security attached to the loan, and therefore the bank is less protected. Unsecured loans include credit cards, signature loans and student loans. In the case of default on an unsecured debt, the bank may sue the customer to recover the funds.
- A home mortgage loan allows you to borrow to either buy or refinance a home. A home loan allows us to withdraw the equity we have in the home to take care of specific needs, such as making improvements or repairs to the home. Getting a home loan requires an extensive amount of paperwork and time. One must provide documentation as requested, submit a large down payment and schedule a home appraisal to determine the value of the property before final approval. Since home loans are associated with a high-value assets, rates for them are usually some of the most reasonable.
- A car loan to apply for a car loan at a bank, one must have a car in mind that they are wishing to purchase. The bank quotes an interest rate for the loan based on the make and model of the car as well as an evaluation of the clients credit profile. One’s income and the amount of a down payment made on the car is also a factor into the car loan approval decision.
- Basic personal loan. Personal loans qualify as unsecured debt, as there are no asset to back the loaned funds, and thus often come with higher interest rates compared to home and car loans. However, in some cases the bank representative may ask for collateral meaning an item of value to secure the loan. Personal loans are used for a variety of needs, ranging from student tuition to covering everyday expenses.
- Business loans. Banks also offer business loans to start a company or continue ones current commercial operations, some banks offer small business loans. Once approved the funds can be used to pay for common business needs, like equipment, supplies and materials. One of the most important items needed to apply for a business loan at a bank is a complete business proposal describing business plans in detail.