Bank loan: understand how this popular financial operation works

The bank loan is the most known and used financing modality in the country. However, contrary to popular belief, the loan is not a financial operation performed not only by banks. Currently, credit unions, stores and various financial institutions offer loans for different purposes.

There are several bank loan models that can be granted according to the bank and who intends to withdraw. Therefore, it is up to the Central Bank to supervise and regulate  the financial institutions that make the concession.

How does a bank loan work?

A bank loan consists of a contract signed between the customer and a financial institution, where the first receives the amount that must be returned to the bank by a predetermined date. At maturity, the bank will receive the principal plus interest. Unlike financing, resources obtained from the loan do not have a specific destination.

The operation consists of the transfer of an amount that must be paid in installments . The greater the number of these installments, the higher the interest rate charged.

Bank loans are made with the money that other people deposit in financial institutions - for example, when a customer leaves an amount to pay in savings.

Overview of bank loans in Brazil

Bank loans have become such a common financing alternative that a survey by SPC Brasil, in August 2018, showed that 2 out of 10 Brazilians had already taken out a loan in the last 12 months.

Furthermore, between June 2006 and June 2016,  bank loans grew an incredible 248.8% in the country, according to the National Association of Finance, Administration and Accounting Executives (Anefac).

How do banks profit from loans?

Profit from bank loans comes from the difference between raising and offering these funds to the market. Known as banking spread , this difference varies according to the interest charged in the two operations. In addition, as the demand for loans increases, the spread is higher.

Savings yield rates are close to 0.5% per month, while interest rates are at least 4.25%. Therefore, by subtracting the first rate from the second, the profit of the operation is found.

That is, let's say someone has left 5 thousand reais in a savings account, yielding interest of 0.4% per month. Imagine now that the bank makes a loan of 5 thousand reais to another customer, charging an interest of 5% per month. It is from this difference between rates that the bank profits from its loans.

The  interest rate on the bank loan varies according to some aspects, such as:

Loan amount;

Goal;

Bank type;

Number of installments;

In addition, loans that the bank considers to be more risky charge higher rates. Therefore, the customer's financial situation and the risk of default involved in the operation are also taken into account .

Some public banks offer some advantages in granting loans for some purposes. For example, BNDES bank loans offer customers lower interest rates and easier plans for starting a business and for legal entities to purchase machinery and tools.

Why is it important to simulate a bank loan?

As several financial institutions offer loan options, the bank loan simulation  has become a very useful tool. Before closing any deal, it is important to research different institutions. In the long run, interest rates can represent financial savings.

In addition, as a simulation it is possible to compare the terms and policies of each of the institutions. The importance of researching and simulating proposals for a bank loan is a future indebtedness that could harm the debtor financially.

Therefore, in addition to the simulation, it is essential to carry out financial planning to find out if it is possible to pay the bank loan installments . In this situation, it is essential to put everything on paper or use a good financial spreadsheet — such as the Financial Life Spreadsheet that Suno makes available on its website. If you are interested, access the link and download our spreadsheet for free.