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CandleFocus Glossary Editor
Bank Credit Basics
Bank credit is a type of financing provided by financial institutions, such as banks, credit unions and other lending lenders, to consumers and businesses. Bank credit allows borrowers to access additional working capital or purchase items such as a vehicle or home that might not otherwise be affordable right away. Whereas obtaining a loan usually requires collateral such as a house or vehicle, a credit card usually requires only a person's signature and income details.
Secured vs Unsecured
Bank credit can be secured, meaning that it is backed by an asset or collateral, or unsecured, meaning that it is not backed by an asset and usually requires a higher credit score and income to be approved. Unsecured credit is riskier for lenders because they may have to absorb an entire balance if a borrower defaults on the loan and is unable to pay. Thus, unsecured credit typically carries higher interest rates and fees than secured credit.
Types of Bank Credit
The most common type of bank credit are credit cards. Credit card accounts are revolving accounts that allow a borrower to borrow up to a certain predetermined credit limit until the balance is paid off. Credit cards may allow borrowers to make purchases and/or withdraw cash from an ATM. Interest is charged from the day of the purchase until the balance is paid off.
Another type of bank credit are mortgages, which are secured loans that provide borrowers with a means of financing the purchase of real estate. Mortgages usually cover a period of years, often thirty years, and have much lower interest rates than other types of bank credit.
Car loans are secured loans that borrowers use to finance the purchase of a new or used car. Interest rates on car loans are typically lower than other types of secured bank credit, such as credit cards.
Business credit lines are offered to businesses to help them cover short term business expenses and operations. Business lines of credit can be secured or unsecured and can provide a much needed influx of cash to support operations and/or purchase inventory.
When borrowing bank credit, borrowers should always consider the interest rate, length of the loan, fees associated with the loan and their ability to repay the loan. Bank credit can be a powerful tool when used responsibly and can provide the financial means for a person or business to find success.
Bank credit is a type of financing provided by financial institutions, such as banks, credit unions and other lending lenders, to consumers and businesses. Bank credit allows borrowers to access additional working capital or purchase items such as a vehicle or home that might not otherwise be affordable right away. Whereas obtaining a loan usually requires collateral such as a house or vehicle, a credit card usually requires only a person's signature and income details.
Secured vs Unsecured
Bank credit can be secured, meaning that it is backed by an asset or collateral, or unsecured, meaning that it is not backed by an asset and usually requires a higher credit score and income to be approved. Unsecured credit is riskier for lenders because they may have to absorb an entire balance if a borrower defaults on the loan and is unable to pay. Thus, unsecured credit typically carries higher interest rates and fees than secured credit.
Types of Bank Credit
The most common type of bank credit are credit cards. Credit card accounts are revolving accounts that allow a borrower to borrow up to a certain predetermined credit limit until the balance is paid off. Credit cards may allow borrowers to make purchases and/or withdraw cash from an ATM. Interest is charged from the day of the purchase until the balance is paid off.
Another type of bank credit are mortgages, which are secured loans that provide borrowers with a means of financing the purchase of real estate. Mortgages usually cover a period of years, often thirty years, and have much lower interest rates than other types of bank credit.
Car loans are secured loans that borrowers use to finance the purchase of a new or used car. Interest rates on car loans are typically lower than other types of secured bank credit, such as credit cards.
Business credit lines are offered to businesses to help them cover short term business expenses and operations. Business lines of credit can be secured or unsecured and can provide a much needed influx of cash to support operations and/or purchase inventory.
When borrowing bank credit, borrowers should always consider the interest rate, length of the loan, fees associated with the loan and their ability to repay the loan. Bank credit can be a powerful tool when used responsibly and can provide the financial means for a person or business to find success.