(a) State four differences between a loan and an overdraft
(b) Explain six factors to be considered by a bank manager before granting a loan.
Explanation
| Loan | Overdraft |
| A loan is a bulk sum of money lent to anybody | An overdraft is the amount of money a current account holder draws above his credit balance. |
| A loan account is opened in the borrower's name before the loan is granted | No separate account is opened as overdraft is given to only current account holders |
| A loan is made on longer term basis | overdraft is given on short term basis |
| Interest is charged on the whole amount loaned | Interest is charged on the amount actually overdrawn on current account |
| More documentations are required in granting loans | The process of obtaining overdraft does not require much documentation |
| A loan can be given to anybody with acceptable collateral | Overdraft is given to only account holders |
| A collateral security is needed to secure a loan | A collateral security is not required for aan overdraft |
(c) Factors to be considered by a bank manager before granting a loan.
(i) The volume of the customer's turnover with the bank must be large enough in relation to the loan sought.
(ii) The viability of the project for which the loan is sought must be ascertained.
(iii) The character: The reliability of the customer, his personal integrity, how honest and sincere he had been in paying past loans granted will be considered.
(v) The type of security provided, its nature and marketability are important consideration to make. (Collateral).
(vi) The human capital: The worth of the business and its financial position will be considered. If the business is greatly indebted, the bank may be reluctant to grant further loan.
(vii) Government policy: The existing government policy concerning bank lending is to be considered.
(viii) The purpose for which the loan is to be granted must be legal and agreed with the bank policy.
(ix) The amount required from the bank vis-a-vis the total cost of the project must be considered.