APPLICATION FOR CREDIT

Banks make their profits by lending the money which customers deposit with them to others who need it for personal or business reasons. Most people need more money than they have currently available at some time in their lives.

To be a borrower you must be a customer of the bank because the will be lent to you through a bank account. There are two ways in which you may borrow. The first, and easy, is to spend more money than you have in your current account – to withdraw. The second, and the normal way of borrowing larger amounts or for a long time is the loan.

If a manager permits an overdraft on current account he is likely to set a limit to the size of the overdraft and may stipulate a date by which the account is back in credit. Businesses whose payments and receipts are often irregular will frequently need to use overdraft facilities and they are often granted to private customers as well particularly when the manager knows that regular payments are made directly into the account.

If a loan is granted it will be a fixed sum immediately available for a fixed period of time. The principal and the interest on it may all become due for payment at the end of that period but for personal loans it is common to arrange that the loan and interest are repaid in equal regular installments over the period of the loan. A separate account is opened to record the payments as they are made.

Whether you are seeking money for business or personal reasons there are a number of things that the manger will want to know before he is prepared to grant your request. The obvious facts will be the amount that you seek and the arrangements for re-payment that you are able to suggest. You need to tell him something about the purpose of the loan; a business loan is likely to help you make profits out of which the loan can be repaid with interest and he will to judge whether or not this is likely. Personal loans usually have to be paid out of an income which will not get any bigger and the manager will be particularly anxious to ensure that you are not being too optimistic. In deciding this he will be considerably assisted by his knowledge of you and his estimate of your character.

Sometimes people do not ask for enough money because they are anxious about the burden of repayments. The manager will be wise enough to try and ensure that you will have sufficient amount of money to do what you want to do. Finally, he will consider whether or not you really will be able to repay and what kind of security you can offer against the possibility that you do not repay. In the case of a business the manager may well want to see well prepared, relevant documents such as profit and loss accounts and balance sheets for the most recent years. He would also ask about the expected return from the use of money and want to see some figures upon which you have based your calculations. For a business good security might be one or more of the assets of the business whilst personal loans are often secured by such things as life insurance policies on which the bank is making regular payment for you or the deeds of your house.

1. What two kinds of borrowings are possible?

2. In what circumstances an overdraft on current account is permissible?

3. How are personal loans usually repaid?

4. Will you pay back more than you borrowed? What will the difference be?

5. What information will the manager require for a personal loan?

6. What information will be required for a business loan?

7. What other things will he take into account?

8. What will be he need from you to make the loan safer for him?