When a customer wishes to borrow from a bank his branch manager will have to consider the following points before deciding whether to lend:
- the character of the customer:
Is the customer honest and has his banking record been sound?
- the amount needed:
Has the customer asked to borrow enough money and does he have any savings which can be used alongside the loan?
- the period of payment:
For how long does the customer need the money?
- the purpose of the loan:
What is the money to be used for?
- the capability of the customer to repay the loan:
Will the loan be used to give sufficient profit to repay the loan or does the customer have sufficient income from other sources?
- the collateral security available:
Does the customer have any assets, e.g. a house or share certificates, which can be used as security for the loan? If the customer is unable to repay, then the security can be sold in order that the bank may obtain this money.
As part of its general economic policy the government might instruct banks to give preference to certain types of borrowings, e.g. exporters.
Loans
A loan is granted for a stated sum of money, e.g. £ 2,000 for a stated period of time, e.g. for two years. The rate of interest is fixed for the length of the loan and is based on the principal (the full amount borrowed), whether or not at has been used. When a loan is agreed a separate loan account is set up for the customer. Thus loan account is debited with the amount borrowed, while at the same time the customer's current account is credited with that amount. The customer can then make use of this sum immediately from his current account and repayments will be made every month to the loan account, usually by standing order, until the loan plus interest is repaid. Before granting a loan, the bank manager will ask the customer to complete a loan application form, so that the manager can assess the ability of the customer to repay.
Overdrafts
An overdraft occurs when the holder of a current account is allowed to issue cheques for more than the client has in his account, up to an agreed maximum. The rate of interest can vary during the period of the overdraft and is charged only on the amount overdrawn on a day-to-day basis.
An overdraft can be repayable on demand although in practice banks rarely insist on this. Before granting an overdraft the bank manager will probably not ask for an application form to be completed, but will simply talk to the applicant. An overdraft is, therefore, a less formal method of lending, although the manager must still ensure that the overdraft will be repaid.
A firm will use a loan when buying fixed assets, e.g. machinery or vehicles, where the precise amount to be spent and the time when required are known. A personal loan can be taken out by an individual to buy, say, a car.
A firm will use an overdraft as working capital to buy stock, pay wages etc., where the amount needed is not exactly known and may vary from day to day. An individual can take out an overdraft to cover a period when, for example, he suffers a temporary loss of income, or has to meet unexpected expenses.
Active Words and Phrases:
| borrow (money) from a bank | брати позику в банку | grant (a loan) | надавати (позику) |
| savings | заощадження | rate of interest | банківська ставка |
| loan | позика | to debit | дебетувати (віднести на дебіт) |
| repay the loan | повертати позику | credit | записати на кредит |
| security | гарантія | standing order | регламент, розпорядок |
| profit | прибуток | overdraft | перевищення кредиту. |
| income | дохід |
Ex. III. Answer the questions:
1. Describe the basic difference between a loan and an overdraft.
2. What is the difference between a saving account and a loan account?
3. How and to whom is interest paid in case of a loan account?
4. What is a customer asked to complete before he is granted a loan?
5. In case of an overdraft, how big is the maximum a holder is allowed to issue cheques for?
6. How long should the overdraft be repayable?
7. In what case can a firm use an overdraft?
8. In what case can an individual take out an overdraft?
Ex. IV. Use the following word-combinations in sentences of your own:
| - a sound banking record | - to make repayment to …; |
| - the period of payment | - to complete a loan application form; |
| - income from other sources | - assess the ability to repay; |
| - a security for the loan | - to issue cheques for; |
| - government guidelines | - the period of the overdraft; |
| - to give preference to … | - to repay on demand; |
| - to grant a loan | - the precise amount; |
| - a stated sum of money (period of time) | - a personal loan; |
| - the rate of interest | - a temporary loss of income; |
| - to set up a (loan) account | - to meet unexpected expenses. |
| - to make use of the sum |
