Theory question 108
BankingCommerce 2 (essay)
(a) State four differences between a loan and an overdraft.
(b) Explain six factors to be considered by a Bank Manager before granting a loan.
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(a) Any four: a loan is a fixed sum credited to a separate loan account, an overdraft lets a current account go into debit; a loan is open to customers with any account, an overdraft only to current account holders; interest on a loan is on the whole sum, on an overdraft only on the amount used; loans are usually longer-term, overdrafts short-term; loans are repaid in fixed instalments, overdrafts fluctuate; loans usually need collateral, overdrafts may not.
(b) Any six, explained: character/integrity of the borrower; capacity to repay (income, cash flow); collateral/security offered; purpose of the loan; amount and duration; past record with the bank; capital the borrower has in the business; government/central bank credit policy; economic conditions; guarantors.
The '5 Cs' (character, capacity, capital, collateral, conditions) cover most of (b).