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Lending Money (Overdrafts, Loans)

Economics notes

Lending Money (Overdrafts, Loans)

➡️ Increased spending power of businesses and individuals
➡️ Increased investment in capital goods and services
➡️ Increased economic growth and employment opportunities

What is the difference between an overdraft and a loan?

An overdraft is a type of short-term borrowing where a bank allows a customer to withdraw more money than they have in their account, up to a certain limit. Interest is charged on the amount borrowed and the customer is required to pay it back within a specified period. A loan, on the other hand, is a type of long-term borrowing where a lender provides a borrower with a lump sum of money that is repaid over a set period of time, usually with interest.

How do banks determine the interest rates for loans and overdrafts?

Banks determine the interest rates for loans and overdrafts based on a number of factors, including the borrower's creditworthiness, the amount of money being borrowed, the length of the loan or overdraft, and the current market conditions. Banks also take into account their own cost of funds, which is the interest rate they pay to borrow money from other financial institutions.

What are the advantages and disadvantages of borrowing money through overdrafts and loans?

The advantages of borrowing money through overdrafts and loans include access to funds when needed, the ability to finance large purchases or investments, and the potential to improve credit scores through timely repayments. However, the disadvantages include high interest rates, fees and charges, the risk of defaulting on repayments, and the potential for debt to spiral out of control if not managed properly. It is important for borrowers to carefully consider their financial situation and ability to repay before taking on any form of borrowing.

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