Question

Explain any four merits of borrowing funds from financial institutions.

Answer 1

Merits of Borrowing Funds from Financial Institutions:

Immediate Infusion of Cash:
The main benefit of borrowing money from a financial institution is the ability to obtain a large amount of money quickly. This money can be used for necessary purchases and investments, including investments in your own education. Financial institutions can lend more money than most friends and family members can.

Interest Rates:
Financial institutions attach interest rates to the principal amount borrow ed. An interest rate can either be positive or a negative. Borrowers with good credit can attain a loan with a lower interest rate. This, in turn, makes the loan less expensive in the long run. Borrowers with poor credit scores can likely only attain a loan at higher interest rates. This can make borrowing money an expensive decision and possibly unattractive as a financial option. Interest rates also fluctuate. As such, borrowers should watch interest rates to borrow when rates are low. A strong credit score and favorable market interest rates produce a favorable borrowing environment.

Collateral:
Collateral is a legal interest, otherwise know n as a lien, that a financial institution places on an asset in case you default on your loan. A common form of this interest is the home mortgage. Collateral removes the risks a financial institution takes on when lending out large sums of money (a house mortgage or car loan, for example). Upon default, the financial institution takes control of the asset and sells it for a profit to cover any losses. This secures the institution against losses and creates the freedom to lend out larger amounts. Loans backed by collateral, also known as secured loans, offer lower interest rates but present the clear danger of losing your property.

Traditional Banks and Credit Unions:
Traditional banks and credit unions offer different benefits to borrowers. Traditional banks offer sen ices to all potential customers. Even though anyone can potentially use the financial services of traditional banks, these financial institutions often offer loans at high-interest rates. Credit unions, on the other hand, are open to specific groups of people, usually people who live in a specific geographical location or those who belong to certain professions. These financial institutions often offer their members lower interest rates, but. unlike a bank, not everyone can become a customer.