A bank loan is a disbursement of funds by a financial institution, which the borrower undertakes to repay on time with interest. The loan is given not only to individuals, but also to companies and entrepreneurs. Its purpose is to support the financial situation or to provide funds for development.

The interest rate is set by the financial institution itself. These figures are not taken from the ceiling, but depend on the key rate set by the Central Bank.

The concept of “bank credit” is defined by four basic characteristics. They are fairly simple, but knowing them makes it easier to understand how the system works.

Repayment.
Funds borrowed from the bank must be repaid. Otherwise, the case will go to court.

Cost.
You can’t just ask a financial institution for a loan, like a friend. You must pay for the service.

Deadline.
Borrowed funds must be returned within a certain period of time, prescribed in the contract. The repayment is carried out exactly according to a schedule – this is convenient for everyone, because this way the sum is divided into comfortable payments and repaid regularly at a measured pace.

Differentiation.
The terms of the loan are set for a specific situation.

The functions of the loan
Let’s look at the main functions that loans perform, or, simply put, to answer the question: why do we need credit globally?

Distributive.
This means that the loans distribute funds to those who have them and those who need them.

Issuance.
Loans create credit money to replace cash.

Control.
The credit system establishes certain rules for the borrower’s use of funds. For example, through targeted loans.

Incentive.
The essence of the loan implies that the customer must spend it efficiently and do everything possible to pay it back.

Social.
Loans can be used for education, improvements, business development, and so on.