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Question
Explain the following term/concept:
Loans
Solution
1) Loan is an arrangement by which the bank advances an amount against securities like shares and debentures, government bonds insurance policies or valuables like gold ornaments, jewelers, etc. This amount is either paid in one sum or is credited to a separate loan account in the name of the customer. It is granted for a fixed period. Interest is payable on the entire amount sanctioned irrespective of the amount actually withdrawn by the borrower.
2) Short term loans are provided for the period of not more than 1 year. It is required by businessman to meet the need of working capital. Bank charges interest at the rate higher than is charged on overdraft. Medium term loans are provided for a period from 1 year up to 5 years. Interest charged on this type of loan is higher than interest rate charges on short term loan. Long term loans are provided by the bank for the period more than 5 years. It is given for growth and development of the business. Interest charged on the long term loans is higher than that is charged on Medium term loans.
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