Bank Credit

What is a Bank Credit?

Definition

‘Bank Credit’ is a financial term used to refer to the amount of money a business or individual can borrow from a bank. It is also referred to as the money that has already been lent to a borrower by a bank. Bank credit can take up various forms such as mortgages, credit card accounts, and overdraft lines (in some cases).

How Bank Credit Works

The cost and terms of bank credit are dependent on the offers of competing banks, collateral being offered, and the creditworthiness of the borrower. Just like requesting a loan from a lending institution, bank credit greatly considers a borrower’s creditworthiness before making any further considerations such as current income, use of funds, collateral, previous debts, and assets (if any).

Individuals mostly require bank credits through credit cards; here, it is required of the borrower to begin with a zero-balance account, a specific credit limit, and an agreed Annual Percentage Rate (APR). For businesses, a bank credit may be required to fund startups, expand businesses, or purchase of goods and services as short-term financing.

Bank credit is classified into two: secured and unsecured, each having its own cost and terms. A fixed monthly payment plan is created for the borrowers within a stipulated period of time to be paid back with interest.