Glossary term
Bank Loan
A bank loan is money borrowed from a bank and repaid over time under agreed terms, including interest, fees, collateral, covenants, and a repayment schedule.
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What Is a Bank Loan?
A bank loan is money borrowed from a bank and repaid over time under agreed terms. Those terms usually include the loan amount, interest rate, fees, repayment schedule, maturity date, collateral, and borrower obligations.
Bank loans can be used by consumers, businesses, nonprofits, and governments. They can be secured or unsecured, short term or long term, fixed rate or variable rate, revolving or installment-based.
Key Takeaways
- A bank loan creates a legal obligation to repay borrowed money with interest.
- Loan terms define the rate, payment schedule, maturity, fees, collateral, and default rules.
- Bank loans can be consumer loans, mortgages, business loans, lines of credit, or other credit products.
- The cost of a loan depends on more than the interest rate alone.
Common Bank Loan Types
Loan Type | Typical Use | Key Risk |
|---|---|---|
Installment loan | Fixed repayment over time | Payment burden if income changes |
Line of credit | Flexible borrowing up to a limit | Variable rates and revolving debt risk |
Mortgage | Purchase or refinance real estate | Collateral can be foreclosed after default |
Commercial loan | Business working capital, equipment, or expansion | Cash flow may not support debt service |
Secured loan | Borrowing backed by collateral | Collateral can be lost if loan defaults |
What Banks Underwrite
Banks evaluate repayment ability. For consumers, that can include credit history, income, debt-to-income ratio, collateral, and loan purpose. For businesses, it can include cash flow, financial statements, collateral, owner guarantees, industry risk, and debt-service coverage.
The bank's approval decision is not just about whether the borrower wants the money. It is about whether the borrower is likely to repay under the agreed terms and whether the bank is adequately protected if repayment weakens.
Cost and Cash Flow
The interest rate is only one part of loan cost. Origination fees, late fees, prepayment penalties, collateral costs, appraisal costs, insurance requirements, and variable-rate resets can all affect the true cost.
Borrowers should also look at cash flow. A loan that appears affordable at closing can become stressful if income falls, revenue slows, expenses rise, or the rate adjusts upward.
The Bottom Line
A bank loan is a structured borrowing arrangement with a bank. It can provide useful financing, but it also creates repayment risk. The most important terms are the full cost, payment schedule, collateral, covenants, and whether the borrower’s cash flow can support the debt.