Bank Loans  

A bank loan is when a bank offers to lend money to consumers for a certain time period. As a condition of the bank loan, the borrower will need to pay a certain amount of interest per month, or per year.

Secured Bank Loan. This is a loan which uses an asset as collateral. A good example is a mortgage loan. For this type of large loan, the Bank secures the house as collateral. If people, defer on their loan, the bank is able to legally possess the home to pay off the outstanding debt.

Unsecured Bank loan. This is a loan given without any asset for collateral. These tend to be for smaller amounts and typically attract a higher interest rate because of the perceived risk.

Inter Bank Loan. Often commercial banks are short of money and so are forced to borrow money on the money markets. These are typically short term loans and can be interbank or direct to the Central Bank.

Bank Loan Interest rates

Bank interest rates are influenced by the Central Bank’s base rate. This base rate, is the rate at which commercial banks have to borrow from the Central Bank. Because this rate is so important to the banking system, if the base rate goes up, commercial banks will invariably increase their saving and borrowing rates to consumers. However, there are other factors. In a credit crunch it can be difficult to attract sufficient funds and therefore, interbank lending is more expensive and difficult. Therefore loan rates can rise, even if base rates stay the same.

Bad Credit Loan interest rates. For those customers with bad credit (often called subprime) banks will charge higher rates. During a credit crunch or adverse financial situation, people with bad credits may find it difficult to get any loans at all.

 

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