Credit: what it is, types and functions of credit

What is a loan?

A loan is a financial obligation of two parties, one of which provides cash or other resources, and the other promises to repay them according to the principles of urgency, payment, and repayment.

The loan can be interest-free, in which case it will be called an installment plan. Such loans are provided by shops, the state (for example, as a measure to support small businesses), and sometimes developers.

Lending, from the point of view of the bank's client, is the borrowing of money on individual terms fixed in the contract. It specifies the interest rate and term in months, fixes the date and amount of the monthly payment, as well as the possibility of early repayment. The borrower repays the loan gradually, reducing the amount owed to the lender.

Many people are prejudiced against bank loans, preferring to save. However, this position is not always the only correct one. A loan can be a really profitable financial instrument. It often turns out that it is cheaper to buy the right things or services right now. For example, while you are saving from your salary for a purchase, inflation "eats up" part of your savings, and the product itself becomes more expensive.

The main functions of the loan are:

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  Redistributive – credit relations allow you to redistribute free funds in favor of those who need them.

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  Emission function – credit funds in circulation are created by the financial system as a whole, and not by an individual bank.

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  The stimulating function is manifested in the possibility of developing production without the availability of own funds.

Forms of Lending

There are different classifications of loans. For example, depending on the source and purpose of the funds, a distinction is made between:

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  International loans. They are allocated as assistance to countries, as well as to large borrowing companies within the framework of projects and relations that are significant for the state.

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  Government subsidies. They are aimed at supporting various sectors of the economy, small and medium-sized businesses during crisis periods.

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  Commercial loans. Funds or goods of legal entities are issued to borrowers for the conclusion of commodity transactions under an installment agreement.

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  Bank loans for individuals and legal entities. Banks use their own reserves (account and deposit balances) to issue funds at interest.

The first two types are characterized by large volumes and long maturities. We often encounter the latter in our daily lives.

Types of bank loans

Loans are categorized according to what the money is required for:

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  Loans for business development, closing cash gaps and other loans for legal entities.

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  Mortgage. It is issued for the improvement of living conditions: the purchase of an apartment, a plot with a house or the construction of a summer house. The property is pledged to the bank. In the event of systematic major breaches of the contract, it can be lost.

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  Loan secured by real estate. Allows you to get cash secured by an existing home or car. The main advantage is that you can get large sums for any purpose without guarantors. Since such loans are taken for a long time, it is important to carefully calculate and foresee everything.

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  A car loan is a loan for the purchase of a car. Financial institutions usually issue such loans at a low interest rate.

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  Consumer. The money is issued in cash or transferred to the borrower's account. They can be obtained for any purpose, for example, for vacation, children's education, the purchase of expensive equipment, repairs. Banks issue small loans without collateral and guarantors with a minimum set of documents.

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  Refinancing. This is the receipt of funds in one bank to pay off the debt and accrued interest in another. Refinancing allows you to reduce the size of the monthly payment, reduce the interest rate, extend the loan term or make it more convenient to repay the loan.

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  Restructuring. If you have a difficult life situation, you need to apply to the bank where you took the loan. The terms of the contract may be revised to make it easier to repay the debt.

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  Credit. These are revolving loans. With such a card, you can use the bank's money an unlimited number of times within the credit limit - pay for purchases or withdraw cash. You can use the money for free, but there is usually a fee for servicing the card. It is important to study the terms of such a loan, since in some cases the grace period — the period during which no interest is accrued on the debt amount — ends early.

According to the method of repayment, annuity and differentiated loans are distinguished. The overpayment to the bank will be the same in both cases, if the debt is repaid according to the payment schedule.

Annuity payments are always the same. Thanks to this, it is convenient to plan your budget. Contributions consist of unevenly distributed debt, as well as the amount of overpayment. First, the interest is repaid, then the principal debt.

The differentiated repayment system differs in that the amount of monthly installments is initially higher and then decreases. This is due to the fact that the amount of the principal debt is evenly distributed over the entire loan period, and interest is added to it, the amount of which gradually decreases.

When determining the interest rate thresholds, banks are guided by the key rate set by the Central Bank. The regulator monitors the terms of loans and posts the statistics on the official website.

What is important to pay attention to when applying for a cash loan

First of all, it is important to determine why the money is needed and how much. For example, if you are planning a renovation, you first need to make an estimate. Take into account that you may face additional expenses, and include a reserve in the loan amount to cover such expenses. If the surplus is not required, it can be used for early repayment of the debt.

It is important to choose the right loan term so that the amount of the monthly payment is comfortable. The bank provides a loan for a period of 1 to 5 years. The longer the term, the lower the monthly installment, but the overpayment increases. You can reduce the amount of the latter with the help of partial or full early repayment. Banks have different conditions for accounting for overpayments: in some cases, repayment takes place on the same day, in others it is counted only on the date of the monthly payment. Clarify the terms and conditions to correctly calculate the budget and the amount to be repaid.

For unforeseen cases, you can activate the borrower's financial protection option. The terms and conditions of insurance programs vary, but almost everywhere there is coverage for risks such as the risk of job loss, serious injury, etc.

What you need to get a loan

First, you need to decide on the purpose of lending. For the purchase of real estate, a mortgage or a car loan is more suitable, it is more convenient to make small daily purchases "before payday" using a credit card. A cash loan will help you realize the rest of the goals.

Secondly, it is important to comply with the bank's requirements. They can vary significantly from one financial institution to another. As a rule, restrictions relate to the age of the borrower, length of service, and the availability of permanent registration. You can get acquainted with the terms of lending on the official websites of banks, there is also a list of documents required to obtain a loan.

Banks always offer more favorable conditions for salary or regular customers. You can apply for a loan for a longer period, thereby reducing the size of the monthly payment, or borrow funds at a reduced interest rate. The package of necessary documents for reliable borrowers is usually smaller.

It is important to monitor the status of your loans and repay the debt on time. All information about applications submitted to banks and issued loans is entered into a personal file in the National Bureau of Credit Histories. The system constantly assesses the financial condition of the borrower. The assigned rating affects the terms and conditions of future loans.