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.