Banking Credit

By: EconomyWatch   Date: 9 September 2010

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Banking credit is the elemental source of all other forms of credit in the society. The other significance of bank credit is in the form of checking account credit. The primary source for this credit comes from the depositor's savings account. In this article a serious attempt is made to take a look at the most common forms of banking credit.

 

Forms of Banking Credit:

Loans:

Loan is a type of debt in which the lender lends money to the borrower and the borrower pays back the loan with interest either in installments or as a whole after a specified period of time. Both the lender and borrower can be a person or an organization. In present times the group of lenders has been typically reduced to commercial banks. The moneylenders have been eliminated as they used to charge a higher rate of interest and imposed stringent terms and conditions. In the process of lending, banking credit flows out to satisfy desirable needs of people whose dreams couldn't have been otherwise realized. There is a list of pre-specified terms and conditions laid down by the bank. The bank keeps an asset of the borrower as collateral to secure the loan. This is important because the bank bears the whole risk default by the borrower. Following are some forms of the banking credit in terms of loans that are commonly used:

  • Home Loan- Home loans give an opportunity to a person to purchase the desired private dwelling using banking credit and later repay it according to pre-decided terms. A home loan also helps one who already owns a house but wishes to make it better using some innovative ideas but lacks the resources to fulfill his aspiration. The title or deed is held by the bank until the borrower has fully repaid the loan (and interest).
     
  • Automobile Loans- an automobile loan helps one to buy the vehicle of his choice. It is a secured loan in the sense that the collateral in this case is represented by the vehicle bought using the loan. New as well as used cars can be purchased using an automobile loan. The loan is a continuous flow of the banking credit because as borrowers periodically payback the loan amount and interest the balance of the automobile loan keeps on liquidating.
  • Home Equity Loan- This is a type of second mortgage banking credit that is suitable particularly for homeowners and the security is by a mortgage on the property. The loan amount may carry fixed or floating rates. A house owner can successfully use his house as a collateral for the loan and the loan proceeds can be usefully employed for paying education or medical bills or buying another house.
     
  • Student Loans- These are federal funded banking credit that help students to pay the the (sometimes extraordinary) costs of professional college education. These have no statute of limitations. The student loans carry lower rate of interest and usually can't be included in bankruptcy. New Mexico Student Loans help qualified persons by financing and servicing educational loans. The Canada Student Loans Program is another program with similar objectives.
     
  • Term Loans- Term loans are usually granted for a period of 3 or 5 or 10 years and the borrower continuously repays the principal and accruing interest in such a way that the loan is fully amortized by the end of the term. Collateral in case of such loans are usually real estates or equipments.

    Credit Cards:

    Beside loans, credit cards nowadays also form a whopping proportion of banking credit. The use of credit cards has increased exponentially in the last few years. Credit cards facilitate retail transaction and the credit card issuer actually lends money for the time being to its user. The user agrees to pay the issuer the sum along with interest. Customers prefer it as the reluctance to carry money. Many banks offering credit cards also reward a substantial consumer in kind or in terms of cash back. However there are frequent cases of fraud in credit cards as a form of banking credit as it can be easily stolen or is prone to duplicable. The banks usually refund a part of the money that the consumer has not spent if theft or loss is proved. Master Card and Eurocard are some of the most common credit cards that are in use.

    Banking credit is simply the borrowing capacity of an individual provided by banks. This of course depends on the credit history of the individual. So maintaining an excellent credit history always pays.

 


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