These things, my friend, are called ‘The Subtle Art of Making Money.’ You cannot point fingers at those who are doing such businesses first; because it is legal; second, they help you get money too.
There’s a concept called ‘cash-flow,’ which means that cash flows from one person to another. The cash flow is the aspect of business that keeps the company up and running.
There’s also a concept named ‘accumulated wealth’; in layperson’s terms, this means that some people accumulate their wealth to themselves instead of sharing it with others. Now that we’re clear with these two concepts, let’s move further.
We will discuss four essential things that one should understand individually to understand how the business of personal loan works in the first place.
- Understanding the basics.
- Impact on the borrowers.
- Effect on banks
- Looking at this facility in the context of the overall economy.
Let’s initiate this informative process!
- Beginning with the basics:-It is an unsecured (collateral-free) type of credit facility most feasible for the people in the service sector. The personal loan interest rates depend on the amount of loan you take and the tenure. The credentials are also a factor that influences this rate, concerned mainly with the eligibility criteria. The eligibility criteria are that the borrower should be of legal age. The borrower should have a credit score of 750. They should produce identity proof, address proof, and income slip for this loan facility to process further. The debt has specified time and is settled in the given time only.
- Influence on the borrowers:-These loans are for anyone who has a credit score above 750. A higher credit score implies higher and better creditworthiness and reliability. It is a forming part of the personal loan eligibility criteria. The person should be able to pay back the loan in the mutually agreed time frame. A person can use that money for business expansion, investments, land procurement, weddings, or anything they want. Loans strengthen the purchasing power of an individual. Thus they are capable of influencing a purchase that is beyond their budget. It helps the borrower to increase his standard of living as well.
- Banks are getting affected:-The effect of this loan facility is mostly on the borrower, but the other side always remains in the curtains because people don’t want to explore it. Bollywood has still managed to put bank personnel in a bad light, where they take money from the people. However, the reality is something else. Banks also get benefited from every loan one takes. When you take a loan, you are liable to pay interest to the bank every month, or however, your scheme asks you to do so. That way, you increase the cash-flow within the bank itself. For example, when we take an SBI personal loan, then the bank gets profits by the interest it takes. Your money helps them to disburse loans to others. It is how it completes a ‘Circle of Loans’, and that’s how you and the bank benefit from these loans or any other loans.
- Effect on macro-level:-Now that you have understood the two-way stream of cash-flow, we’ll see how it seeps into the ground of the economy and affects everyone in general. Now that you have taken a loan, you have a better purchasing power in your hand than before. It starts a new cycle. For example, you’ve taken out a loan to pay off a certain amount of debts and buy something new. When you repay the debts to the person you owed to, you have shared this purchasing power with him. He then uses the money you’ve paid for something else, and that’s how the money keeps rolling through his chain. Similarly, when you buy something, for example, a new phone. The money that you pay to the company, for instance, Croma. The Croma store manager distributes that money to its employees, thus giving them an individual purchasing power.
These were the four factors that tell us how the business of these loans runs on a more significant level. All the above examples were very minute, just to make it lucid to understand. In reality, it has a more massive impact on the economy. Especially in these times when the GDP (Gross Domestic Product) is low, loans can be an alternative to keep some cash rolling around.
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