A bank loan is credit extended by a bank to a household, firm, or other borrower under agreed terms for repayment, interest, and risk management.
Why bank loans matter
Bank loans are one of the main channels through which savings are transformed into spending and investment. They finance working capital, durable consumption, housing, and business expansion.
What determines the terms
Banks price loans based on expected default risk, collateral, maturity, and funding costs. That is why the same nominal amount can be offered at very different rates and conditions to different borrowers.
Economic significance
Loan supply affects aggregate demand, firm entry, household consumption, and financial stability. When banks tighten lending standards, the effect can spread far beyond the borrowing sector because credit conditions shape who can spend and invest.
Knowledge Check
### A bank loan is:
- [x] credit extended by a bank under repayment terms
- [ ] equity ownership in the borrower
- [ ] a government tax refund
- [ ] a fixed exchange-rate promise
> **Explanation:** A loan is a debt contract, not an ownership stake.
### Why can bank loans affect the broader economy?
- [x] Because credit conditions influence spending and investment decisions
- [ ] Because loans matter only to the lender
- [ ] Because banks never ration credit
- [ ] Because borrowing has no effect on demand
> **Explanation:** Credit supply is a major transmission channel in both macroeconomics and finance.
### Collateral matters for bank lending because it:
- [x] lowers lender risk and can improve access or pricing
- [ ] guarantees zero default
- [ ] makes all borrowers identical
- [ ] removes the need for interest rates
> **Explanation:** Security reduces expected loss if the borrower defaults, though it does not eliminate risk entirely.