Loan refers to the amount that an individual borrows from bank putting anything amongst his property as a guarantee against it. A loan may be a gold loan or a mortgage loan, a house loan or property loan or business loan. All the loans include money to be borrowed by an individual that bank pays him and charges him with a rate of interest that he has to pay back to the bank and serves to be the very factor behind the flourishing of these banks. The exact approach how useful a loan is for a bank can be described as follows:-
Why Loans Are Important in a Bank?
1. A Person Gets the Loan:-
The process of loans begins with a person who comes to take loan from bank for business purposes. This is the person in need or you may say a person who has got a need comes to the bank to propose something as a guarantee and then takes the desired amount from the bank. This proposed amount is given to him by bank after making a contract to pay back all the debts in time.
2. The Bank Receives the Interest Amount:-
The benefit of bank in this agreement is that they get interest on every sum of the amount that they hand over to the others. The borrower pays this interest with a future promise to pay back all the debts and thus the bank makes earnings. Generally property or gold or any other valuable thing like car etc. is proposed as a guarantee to this loan amount.
3. In Case the Person Pays Back the Loan Amount:-
Now if the borrower pays back the amount, say he had taken rupees one lakh at 8% per annum, he would pay back rupees one lakh and eight thousand in return. This amount of eight thousand serves to be an earning amount for the bank that it further gives as loans and for the executions and operations of itself.
4. In Case The Person Is Not Able To Pay Back The Amount:-
In case the person is not able to pay back the borrowed amount, the thing that he had proposed as a guarantee for the loan amount is sold by the bank authorities in an auction and thus the bank recovers its money back making the bid of proposed thing. There is no loss of the bank at all and if the person wishes to save himself from the loss, he would for sure pay back the borrowed amount in time.
5. What the Bank does With the Capital Received:-
The bank does not give loans only to a single person, but it provides this facility to many people in need and the collected sum is given further to other people at an interest bringing further income to the bank. The capital thus keeps on increasing and the bank stays functional.
6. The Loans Related Factors:-
The entire functioning of a bank is thus affected by the loans. With the points mentioned by me, a bank might seem to be the enemy of a borrower but actually it is not. The interest is just a charge of investment that should be paid back by the borrower in time and if the borrower does so, the banks can be a great friend as well.