(a) State four differences between a loan and an... | WAEC SSCE - Commerce - 2011 (Essay)

Question 1 Report

(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.

Answer

(a) Four differences between a loan and an overdraft

Bank Loan	Bank Overdraft
A fixed sum is advanced and credited to the customer's account at once.	The customer is allowed to draw more than the balance in his current account, up to an agreed limit.
Interest is charged on the whole amount borrowed for the whole period.	Interest is charged only on the amount actually overdrawn and for the period it is used.
It is usually granted for a fixed (often longer) period and repaid in instalments.	It is a short-term facility repayable on demand or within a short period.
Security/collateral is normally required.	It may be granted with little or no security, often to trusted current-account holders.

(A further difference: a loan may be granted to any customer, but an overdraft is available only to current-account holders.)

(b) Six factors considered by a bank manager before granting a loan

Character of the borrower: The manager considers the honesty, integrity and past repayment record of the customer to judge his willingness to repay.
Purpose of the loan: The loan should be for a genuine, productive and legal purpose that is capable of generating income to repay it.
Ability to repay: The income, cash flow and financial standing of the borrower are examined to be sure he can repay the loan with interest.
Security/collateral offered: The manager looks at the value and marketability of the security pledged, which the bank can sell if the borrower defaults.
Amount required and the borrower's own contribution: The size of the loan relative to the customer's own stake in the project is considered; a reasonable owner's contribution reduces the bank's risk.
Period/duration of the loan: The length of time for which the loan is needed and the repayment plan are assessed to match the bank's lending policy.

(Other valid factors: the customer's existing relationship with the bank, prevailing government/central bank credit policy, and the profitability or viability of the project.)

Read lesson note on Financing Business (JAMB)

Answer Details

(a) Four differences between a loan and an overdraft

Bank Loan	Bank Overdraft
A fixed sum is advanced and credited to the customer's account at once.	The customer is allowed to draw more than the balance in his current account, up to an agreed limit.
Interest is charged on the whole amount borrowed for the whole period.	Interest is charged only on the amount actually overdrawn and for the period it is used.
It is usually granted for a fixed (often longer) period and repaid in instalments.	It is a short-term facility repayable on demand or within a short period.
Security/collateral is normally required.	It may be granted with little or no security, often to trusted current-account holders.

(A further difference: a loan may be granted to any customer, but an overdraft is available only to current-account holders.)

(b) Six factors considered by a bank manager before granting a loan

Character of the borrower: The manager considers the honesty, integrity and past repayment record of the customer to judge his willingness to repay.
Purpose of the loan: The loan should be for a genuine, productive and legal purpose that is capable of generating income to repay it.
Ability to repay: The income, cash flow and financial standing of the borrower are examined to be sure he can repay the loan with interest.
Security/collateral offered: The manager looks at the value and marketability of the security pledged, which the bank can sell if the borrower defaults.
Amount required and the borrower's own contribution: The size of the loan relative to the customer's own stake in the project is considered; a reasonable owner's contribution reduces the bank's risk.
Period/duration of the loan: The length of time for which the loan is needed and the repayment plan are assessed to match the bank's lending policy.

(Other valid factors: the customer's existing relationship with the bank, prevailing government/central bank credit policy, and the profitability or viability of the project.)

Read lesson note on Financing Business (JAMB)

Financing Business

View Answer

(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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