A loan is an arrangement in which a lender, most of the time a bank, gives money to a borrower which is returned at a certain time in the future along with interest. The lender gives the borrower a single immediate payment, which the borrower is expected to pay back in smaller payments each month, until the agreed period is completed.
Loans are the main source of financing for small and medium-sized enterprises. These enterprises in turn offer goods and services that affect the economics of a particular region. The loans come from individuals, governments, corporations and financial institutions. They help in the growth of money supply in an economy, the introduction of new products, the opening up of competition and the expanding of business operations. Loans are a major source of revenue for many financial institutions due to credit facilities. The economy of a country will grow as a result of the provision of loans for commercial and industrial purposes. This growth comes from the employment opportunities available, as well as the production of goods and provision of services. The loans can be given to individuals for use in professional, commercial and industrial purposes.
When the loans become non-performing as a result of nonpayment by the borrowers, there will be a stagnation in the economy. Likewise, in an economy that is not doing well, the borrowers may be unable to repay the loans. These non-performing loans will erode the profitability of the banks and lending institutions, and cause a stagnation of economic resources which include labor and capital. A business that has excessive debt will have a reduction in investments, and this affects the economy negatively.
To access loans, a good credit rating is required. This is because the good credit rating confirms the ability of the borrower to pay back the loan. Loan repayments are important as the overall money supply in an economy is increased. The increase in money supply impacts the economy positively as it can be used for further lending.
Investment decisions are made every day, that deal with what to consume and how to invest. The investment decisions made range from taking loans to buy a home, using a credit card to make purchases and even taking a personal loan. The decisions to take loans are always influenced by movements in the interest rates. These rates are in turn affected by the movements in the economy. The higher the interest rates, the less money is borrowed. The ease with which loans are assessed can have a negative impact on the economy, instead of alleviating economic hardships. These loans can lead to increased difficulty in paying rent, mortgage and utilities bills. This is due to a debt service burden imposed by borrowing, which can inhibit the ability to pay important bills.