What is a bank loan ? A bank loan is nothing more than a loan given by a bank. Private customers and companies alike can apply for the loan from a bank. The bank is the lender; the private customer or the company is the borrower. A loan agreement is concluded between the lender and the borrower. In this all the important facts and regulations relating to the loan are set out. The borrower must repay the loan to the bank as agreed in the contract, in addition to paying interest. The lender undertakes to make the loan available on the agreed terms and of course not to claim it back prematurely.
Definition of bank loan
How does a bank loan work? The bank loan is a bank loan that is granted at the usual bank interest rates. The borrower receives the bank loan in one lump sum; the repayment is usually made in monthly installments (annuity loan), but it can also be made in one lump sum at the end of the term. If the bank loan is repaid in monthly installments, it is called an installment loan. A term is agreed for the bank loan, the term is usually between one and ten years. The conditions for the bank loan are set out in a loan agreement.
Different time periods apply to mortgage lending. It is not uncommon here to lock in a loan for 20 years. Pure consumer loans, as you can take out when buying in hypermarkets, usually have a significantly shorter term. A 6-digit sum is rarely negotiated here.
The Purpose of Bank Loans
According to whicheverhealth.com, the bank loan is granted by the banks to companies and private individuals and is used to finance capital requirements. A bank loan is outside capital that is made available over a defined period of time. Since the bank grants the loan, it is a bank service that must be paid for by the borrower. The borrower has to pay interest for it.
Companies and individuals can apply for a bank loan if their own financial resources are insufficient or in order not to have to touch their reserves. Bank loans can be granted by the branch banks, but also by direct banks. Companies often obtain bank loans from universal banks or specialist banks, which include Industriebank-Industriekreditbank AG or Kreditanstalt für Wiederaufbau (KfW). Companies and private individuals can apply for promotional loans for various purposes from the Reconstruction Loan Corporation.
Interest on the bank loan – what to watch out for?
The interest that is charged on a bank loan depends on the market interest rate situation. The key interest rate is set by the European Central Bank ( ECB ). There is – depending on the bank – a different amount of premium on this key interest rate. The interest is stipulated in the loan agreement, the interest rate does not change during the entire term. A distinction is made between the pure loan interest and the effective interest, which contains all costs and fees including the loan interest. With the help of the effective interest rate, loans from different banks can be easily compared with one another.
The interest rates differ depending on the bank. They are based on the loan amount and the term, they are also dependent on the creditworthiness of the borrower. The bank carries out a rating of the borrower in order to determine the creditworthiness, it protects itself against the risk of payment default. If the borrower has a good credit rating, correspondingly low interest rates are set for the bank loan.
- Loan amount
- Term (= fixed interest rate)
- Collateral / creditworthiness
So determine the interest rate on the loan granted.
Types of bank loans
The bank loan can be divided into different types depending on the repayment:
- Maturity loan – is repaid in one sum at the end of the term
- Amortization loan – with constant repayment during the term, the interest is calculated from the remaining capital
- Annuity loan – installment loan in which the installments are made up of the repayment and interest components and the installments are the same for the entire term
- Term interest loan – the entire interest amount is added to the loan amount at the beginning of the term, the loan is always repaid in the same installments
- Partial Loan – Lender receives a share of the company’s profits in addition to interest
- Bulk Loan – taken out by a company during an ongoing bankruptcy.
Depending on the intended use, bank loans can be taken out as start-up loans, construction or real estate loans, extension loans for investments or for stocking up on goods. Individuals can take out construction and real estate loans, car loans, renovation or modernization loans, and installment loans with small amounts.
Content of the loan agreement
In addition to the name and address of the borrower and lender, the loan agreement must contain the purpose, the amount of the loan, the amount of the installments, the term, the amount of interest and the conditions for repayment. The loan agreement must contain the debit interest as the pure cost of the loan as well as the APR, which includes various fees in addition to the debit interest. If collateral is required from the borrower, as is the case with a mortgage loan, this collateral must be listed in the loan agreement.
Bank loan: how to save
The competition between banks is fierce and it is getting tougher every day. Therefore, the conditions also fluctuate from day to day. If you have received a loan approval from a cheap bank, you are welcome to go to other banks with the offer. If these undercut the loan costs, then you can go to other banks with the recently lower offer. You can’t play this game endlessly, but it can save a few hundred euros.
Of course, you can also use this method to redeem old loans that were taken out on poorer terms. If you negotiate a good interest rate, there are – depending on the loan amount – considerable savings in it. Young entrepreneurs should always keep an eye on the terms and conditions of various credit institutions in order to take advantage of favorable interest rate effects.