Loans and Advance

ASSIGNMENT#1
Submitted to: Mam Rimsha Waqas
Course: Banking (BBA2-PU)
Topic: Loans and Advances
Submitted by: Nimra Fazal 409
Kainat Arshad417
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Loans and Advances
Definition of Loan:
When a financial institution offers a sum of money in the form
of a debt to another enterprise or individual that is meant to be
paid back with interest within a specified period of time is
referred to as a loan.
Definition of Advance:
The common concept of an advance hovers around a type of
loan that is offered to a business entity or an individual may
also seek an advance from a financial institution to meet short-
term requirements.
Thus, an advance is rather like a credit facility extended to a
borrower, which he may use to fulfill any short term
requirements.
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 Difference between Loans and Advances
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Forms of loans and Advances in
Banking
Forms of advances in commercial banking are;
1. Credit card cash advances

Your credit card may offer a cash advance, which is a
short-term loan that you borrow against your card’s
available balance.
2. Overdraft
Overdraft Advance will avoid insufficient checking balances
and prevent your checks from being returned due to non-
sufficient funds (NSF).
3. Loans
Loan is an advance in lump sum amount the whole of which is
withdrawn and is supported to be rapid generally wholly at one
time. It is made with or without security. It is given for a fixed
period at in agreed rate of interest.
4. Demand loan vs. term loan

A demand loan is a loan that a lender can require to be repaid
in full at any time.
A term loan on the other hand is a loan which has a specific

length of term. It has a set repayment schedule.
5. Secured vs. unsecured loan

A secured loan is one that is connected to a piece of collateral
something valuable like a car or a home.
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An unsecured loan is not protected by any collateral. If you
default on the loan, the lender can't automatically take your
property.
6. Participation loan or consortium loan

A very large loan made by more than one lender to a single bor
rower. A participation loan or consortium
loan exists when the lenders have a legal limit on the maximu
m amount they may lend.
7. Purchasing and discounting bills

Bill discounting is an arrangement whereby the seller recovers
an amount of sales bill from the financial intermediaries before
it is due. Such intermediaries charge a fee for the service.
8. Title loans
If you own your car, you may be able to take out a car title
loan. You can typically borrow between 25% and 50% of your
car’s value. you’ll usually have to repay your title loan within
15 to 30 days. If you don’t, your car could be repossessed.
9. Pawn shop loans

A pawn shop loan is another fast-cash borrowing option.
You’ll take an item of value, like a piece of jewelry or an
electronic, into a pawn shop and borrow money based on
the item’s value.
10. Home equity loans

A home equity loan is a type of secured loan where your home
is used as collateral to borrow a lump sum of money. The
amount you can borrow is based on the equity you have in your
home, or the difference between your home’s market value and
how much you owe on your home.
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11. Student loans
These are great ways to help finance a college education.
The interest rates are very reasonable, and you usually
don't have to pay the loans back while you are a full-time
college student
 6 Major Limitations on Credit

Creation by Banks
1. Lack of Securities:
Banks cannot expand deposits by granting loans and advances
unless proper securities are available.
2. The Business Environment:

Loans are taken only when sound investment opportunities are
available. During recessions and depressions, deposits tend to
go down. The business situation in the country is an important
factor which determines the volume of credit.
3. Lack of Cash:
The total amount of cash, available to the banking system
limits the volume of credit that can be created. Credit is based
on cash. The banks must keep a certain percentage of cash
reserve.
4. The Habits of the People:

The habit regarding the holding of cash can affect credit
creation. If liquidity-preference increases, there will be less
cash in the hands of the bank and they will be forced to lend
less.
5. Leakages:
Some borrowers may keep a part of their money in hand
without putting it in a bank. The total volume of deposits will
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be lower therefore a particular bank in the chain may choose to
keep a higher reserve ratio and lend less.
6. The Central Bank’s Policy:

The policy regarding open market operations etc. may
affect the total cash reserves of the banking system and
may make the total created credit less or more than what
it would otherwise be.
 Advantages and Disadvantages of Loans
Advantages of loan:
1. Easily available:
Nowadays loans are easily available to anyone by stable
financial sources like banks, NBFCs, private institutions.
2. Safe:
Nobody can take undue advantage of the borrower in
any emergency.
3. Different types:
There various types of loan as per the needs of the
customers.
4. Low interest rate:

Due to competition among the financial institutions, a
customer gets to benefit from this competition like lower
interest, more time to repay.
5. Facilities:
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Sometimes there are government schemes like saving in
tax, lower interest rate if in a specific time period loan is
taken
Disadvantages:
1. Difficult process:
There is a lengthy process to get a loan it requires
various types of documents, proof, witness and many
other things. So, it takes a longer time to section a loan.
2. Unnecessary requirements:
Sometimes the documents and many other things
demanded by the institutions are so unnecessary that it
makes inconvenient to the client.
3. Less amount granted:

A loan is never granted in the full amount. There is
always a ratio of the amount applied for a loan and the
amount to grant. it may be 80:20 ratio, it means a bank
give 80 percent loan of the applied amount.
“THE END”
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Loans and Advance

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ASSIGNMENT#1

Submitted to: Mam Rimsha Waqas

Course: Banking (BBA2-PU)

Topic: Loans and Advances

Submitted by: Nimra Fazal 409

1. Credit card cash advances

4. Demand loan vs. term loan

A term loan on the other hand is a loan which has a specific

5. Secured vs. unsecured loan

6. Participation loan or consortium loan

7. Purchasing and discounting bills

9. Pawn shop loans

10. Home equity loans

 6 Major Limitations on Credit

2. The Business Environment:

4. The Habits of the People:

6. The Central Bank’s Policy:

 Advantages and Disadvantages of Loans

4. Low interest rate:

3. Less amount granted:

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