The role of commercial banks in capitalistic economies has immensely grown over time and their direct and indirect influence to the growth or otherwise of businesses cannot be over emphasized. As the legal entities to hold cash deposits, they play a pivotal role in fueling the progress of the economy and there is no imaginable substitute to what they do. Indeed, organizations offering banking solutions have existed since the advent of money as legal tender for exchange of goods and services. Their role has, however, grown in leaps and bounds over time, fueled by the needs of businesses and individuals in need of their services.
One of these irreplaceable services that banks offer is loans and related services. Indeed, a bank’s operational life is two thronged, namely taking deposits from clients who have extra liquid cash, and loaning out this money to clients in need of it. Their business life revolves around the differential rate of interest offered on deposits and the interest on loans.
The need for loans and financial advances in businesses and personal lives is so immense as to make it the core function of thousands of banks and similar institutions. And this is for a reason. A businessman who projects a rate of return on investment that is higher than the bank’s lending rate is bound to make a bottom line profit from the loan taken. In other words, a business with a gross profit margin of say 30% would make a 10% income on the investment if it was funded by a bank loan with a rate of interest of 20%.
This is what businesses are about. On the same breadth, a depositor with extra cash at hand will make interest income from depositing the money with the bank. This is because most banks offer an interest on deposit that is higher than the prevailing inflation rate.
Bank loans also come in handy when individuals are out of liquid cash to transact. And while borrowing at a cost to spend on an asset or service that has no income is largely not advisable, banks lend out huge sums of money to individuals to spend on their daily needs. This should not be a problem for the bank so long as the credit is refunded back. For the consumers, the cost of the loan is usually accounted as the cost of a possible inconvenience if the funds were not available. This again is an irreplaceable service that banks offer in fueling the growth of economies world over.
In considering whether or not to take a bank loan, several factors are important to consider. First is the need for the loan. As mentioned, it is not financially prudent to take credit on an endeavor with no income. There are however instances where the inconvenience could be more costly than the interest on the loan thereby covering the need. It is also important to efficiently and effectively spend the loan money, not forgetting it will in the end be refunded. This can easily be achieved through the use of a budget and a spending plan.
Ultimately, whether or not to take the bank loan largely depends on the need at hand and the cost of the loan in interest terms.