Hi im with RBS and am thinking of applying for a loan of £1000
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A loan is a way to get money now if you can reasonably assure you will pay off that money (and some interest) in the future.
Banks like loans because they profit from interests, but they still want to know that you’ll pay back.
So the way it usually works is, you go the bank, ask for a loan, present some kind of proof you have enough money and you will probably have enough money in the future (like payslips), and if they accept they give you a loan of, say, 1000 GBP you have to pay back in 5 years with a 2% interest. Usually, larger loans (like, 100,000 GBP or more to buy a house) require more rigorous proofs because more money is at stake. As a side effect, banks usually take some time to evaluate your situation, which means you cannot usually get a loan the same day you need it.
The main risk is, if you don’t have enough money in the future to pay back, the bank can sue you and try to get something anyway, maybe taking something off your wage straight away, and your credit score will drop.
Another risk, especially for larger loans, is related to interest rates. Some loans have a variable interest rate, which essentially depends on current inflation. If you have a variable interest rate loan and inflation hikes up your interest rates go up and you have to pay more money as interest. This becomes more significant when buying a house or other very expensive items, because you often end up paying a significant part of your income every month to pay back the loan (including interests).
I give you 1000, You pay be the interest of 3% meaning 30 each week.
After 9 month, you pay me back the 1000 you owed. and I have made 270, thats more than 25% increase, I have effectively turned 1000 into 1270,
This is essentially what a loan is, the bank give you money that you don’t have so you can do something / buy something, and in return, you pay the bank back with more money than what they gave you.
The risk is very simple: You use the loan to open a business and suddenly the business went under, you can’t pay back the loan/interest, now you and the bank has to work something out to pay them back. This is what repossession is.
Because interest is also fairly low compared to the initial lump sum, for extremely large amount of money, there is a risk that the borrower will just run off and only pay interest rather than paying the loan back, so instead, banks will provide loan with a time limit, this is the most common form of loaning for companies.
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