What is bank credit?

We explain what a bank loan is and where the borrowed money comes from. In addition, the importance of this instrument in the economy.

  1. What is bank credit?

A credit is a financial operation where an entity grants another one an amount of money in an account at its disposal, the second one committing to return all the money taken, also paying an interest for the use of that amount.

Bank loans are granted by credit institutions, typically banks , by entering into a contract for which the debt is born.

The concept of credit is often confused with that of the loan, the difference is that in the 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 for the whole, beyond how much you actually spend.

The origin of the loan money is in the deposits that others make in the same bank, to which the banking entity pays an interest: it is in that difference between the rates offered for the deposits and the rates charged for the credits 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, the granting of a credit is a vote of confidence by the banking system to an individual or company.

In the case of natural persons, one of the most frequent loans are the so-called mortgages (for the purchase or construction of houses), or those destined to the acquisition of vehicles or other goods of utility for the people, whether for work or for other purposes.

  1. Business credits

Bank credit - company
Receiving a loan can mean future growth for the company.

In the case of organizations (companies, industries, etc.), bank loans logically represent much higher money figures , which are used to capitalize on the organization: it is expected that they can buy machines, hire employees or develop a new one. product that allows you to make a profit , even discounting the repayment of the loan and interest.

In both cases, the potential debtor must demonstrate solvency, offering guarantees or providing receipts and receipts of their equity and results: that is why in the case of companies , often receiving a credit can mean future growth, thus they become attractive in other ways, for example, the price of their shares may rise.

  1. Importance of bank credit for the economy

Bank credit
Bank loans are a fundamental instrument for capitalization.

Bank credit is one of the market variables that has a lot of impact on the economy of the countries . In general, the Central Bank of a country and the so-called state banks mark the levels of interest rates to which private credit institutions 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 return, will surely result in the contraction of sectors such as construction or the automotive or machinery industry, and with that, unemployment is likely to increase.

However, access to unlimited credit has its risks , since there are many precedents of countries where after a while it became impossible for many creditors to get their money back, generating a sudden burst of mistrust and with it, a resounding fall in investment from one moment to another.

However, bank loans are still a fundamental instrument for capitalization , both of individuals and companies. Great ventures throughout history would not have been possible without the initial kick given by one of these financial instruments.

Credit unions aim to bring these injections of money closer to the 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 enterprises, this may be the only viable financing alternative.

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