What is the difference between a bank loan and a personal loan?

With both a bank loan and a personal loan you borrow a certain amount of money from a loan provider and repay that amount at regular intervals, along with the interest on that amount. However, the difference between them is that a bank loan is literally specifically from a bank. It wasn't too long ago when the only place that you could get a loan was your bank, which is why many people used to talk about the need to maintain a good relationship with your bank manager. But now that you can get personal loans from building societies and other financial companies as well as your bank, this isn't so important any more.

Banks, as we know, take money in via savings deposits, whilst also offering mortgages and insurance. But one of the reasons why banks make loans is that they have to pay interest to those savings depositors, and making investments with that money that makes a return higher than the interest they have to pay is how to do this. Providing loans enables banks to charge interest, which recovers the cost of lending the money whilst also offering a profit to the bank, part of which they will use to pay interest to depositors. This is how the banking system works, and accounts for the 'circular' nature of the money supply.

Banks are more careful about to whom they lend money. Applicants with bad credit ratings are unlikely to receive loans from banks, because banks by their very nature tend to be more cautious when they make investments in businesses, financial products and people. So you will need to provide proof that you can repay the loan in the future and part of that is your credit history. You need to be 18 or over to get loan, and, importantly, a bank will need a reason why you require the loan before they give the money to you.

Reasons for a loan are important. Banks don't ask for loans for marketing reasons, or for a 'big brother' type observance of your behaviour. You are not asked for a reason in order for you to be caught out, but it is so that they can provide particular products that suit your purpose. If, for instance, you want a home improvement loan, you will not need all of the loan capital at the same time. You could get a quote for home improvement to be performed, and then find that the amount you actually need is larger or maybe smaller than you originally expected. So banks can offer home improvement loans in tranches, which stops borrowers from borrowing too much or too little.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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