Hi im with RBS and am thinking of applying for a loan of £1000
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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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