How Bank Loans Work Within a Bank !

Bank credit plays a vital role in the economy by allowing individuals and businesses to finance various projects. This article explores how bank loans work, from application to granting, including the different types of loans and the associated risks.

What is a Bank Loan?

A bank loan is an amount of money that a bank lends to a borrower, who undertakes to repay it with interest over a set period. Credits can be used for a variety of purposes, including buying a home, buying a car, financing a business, or consolidating debt.

Types of Bank Loans

There are several types of bank loans, each with its own characteristics:

Real Estate Loan: Intended for the purchase or construction of a property. This type of credit is usually long-term, with fixed or variable interest rates.

Consumer Credit: Designed to finance consumer goods, such as cars or electronic equipment. It can be fixed or variable rate and is often repaid over a shorter period of time.

Personal loan: An amount of money loaned to the borrower for personal needs, without the need for proof of use. This loan is usually unsecured.

Professional Loan: Intended for companies to finance their investments, equipment purchases or working capital needs.

Credit Application Process

A. Preparation of the Application

Before applying for credit, the borrower must assess his needs and his ability to repay. It is advisable to gather the following documents:

Proof of income (payslips, tax notices)
Bank statements
Information on outstanding debts

B. Submission of the Application

The borrower submits their application to the bank, usually online or in person. This request includes personal information, the desired amount and the purpose of the loan.

C. Demand Analysis

The bank conducts an in-depth analysis of the application. This includes:
Risk Profile Assessment: The bank examines the borrower’s creditworthiness by analyzing their credit history, income, and debt-to-equity ratio.
Document Verification: The documents provided are checked to ensure their authenticity.

D. Decision to grant

After analysis, the bank takes a decision to grant it. If the loan is approved, a loan contract is drawn up, specifying the conditions (amount, interest rate, duration, monthly payments).

Repayment of the loan

Once the loan has been granted, the borrower begins to repay according to the agreed terms. Payments usually include a portion of the borrowed principal and interest. Failure to comply with payments can result in penalties and consequences on the borrower’s creditworthiness.

Associated risks

Bank loans involve risks for both borrowers and banks:

For Borrowers: The risk of over-indebtedness in the event of a change in financial situation, such as job loss or unexpected expenses.

For Banks: The risk of payment default, which can affect their profitability. Banks use scoring models to assess credit risk and minimize that risk.