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ZIMSEC O Level Commerce Notes: Money and Banking: Bank Loans and Overdrafts

Bank Overdrafts

  • Are an informal way of borrowing money.
  • They are given to current account holders only.
  • Are a short term form of borrowing.
  • Interest is charged daily on the amounts owing.
  • The interest rate levied on these amounts is usually high.
  • The repayment period is not fixed.
  • The repayments are irregular.
  • No collateral security is required.

Bank Loans

  • Are a formal way of borrowing money.
  • Interest is charged on the whole amount.
  • Collateral security is required from the borrower.
  • A loan account is opened for the customer.
  • The repayment period is fixed.
  • Repayments are done in pre-agreed installments.
  • The interest rate is lower than in the case of overdrafts.
  • The rate of interest is fixed.
  • Information is needed by a bank before granting a loan request.
  • The customer’s personal details for example name, address, date of birth, current payslips.
  • Amount of loan required.
  • Period for which the loan is required.
  • Proof of residence.
  • Details of previous record with bank or other institutions for credit rating purposes.
  • Customer’s current commitment e.g. any other loans currently held.
  • ZIMRA Tax returns.
  • Purpose of loan.

Procedure in obtaining a loan.

  • A customer contacts the bank manager/bank representative.
  • The customer is interviewed by the bank manager/representative.
  • The customer informs the bank what the purpose of the loan is.
  • The customer informs the bank the amount of the loan.
  • The customer informs the bank on his/her collateral.
  • Examples of items that can be presented as collateral include Motor vehicles,equipment or buildings.
  • The customer fills in the application.
  • The application is assessed and if it is successful the customer and bank representative sign the agreement forms.
  • A loan account in the customer’s name is opened.
  • The loan account is credited.

Factors taken into account when assessing the loan application.

  • The current economic climate e.g the Government’s coming Fiscal and Monetary Policies.
  • Local trading conditions for example any current embargoes/ sanctions.
  • Viability, Liquidity and Profitability of the customers proposed project.
  • The financial rating or creditworthiness of the customer.

To access notes on the differences between a bank loan and a bank overdraft go to this page.

To access notes on other topics go to the Commerce Notes page.