The Loan and
Discount
Function
FM 213- Chapter 11
Objectives:
 To
define what is loan
 To
identify the types of
loan
 To
know the
importance of Credit
Investigation
Group Activity
 Group
yourselves into five (5) and choose
your secretary. Prepare 1 whole sheet of
paper.
Loans:
 “Compromise
advances of persons
dealing in commerce and trade”
“A loan is money, property or other material
goods that is given to another party in exchange
for future repayment of the loan value amount
along with interest or other finance charges”
Read
more: Loan https://www.investopedia.com/terms/l/loan.as
p#ixzz5M3g8u2vH
Loans versus Discounts
Loans versus Discounts in banking parlance, mean the
same thing. These are amounts extended to persons
needing capital or for some other purpose. The
difference lies in the fact that loans are advances on
which interest is collected at maturity. Such loans,
however, are treated as discounts when the interest is
deducted in advance.
Discounts

Signifies the accounting term that interest
is paid in advance although not yet
earned.

Hence, it is entered in the bank’s book of
accounts as unearned interest income.

Discount could be also interpreted as a
cash deduction on the regular price of
goods as an attraction to buyers. But, as
far as banks are concerned, it is nothing
but a fund used to accommodate
borrowers. the sales charges.
Discounts

Example:
A businessman borrows P100, 000 for a
period of one year and the interest of 6% is
deducted in advance, it becomes evident that a
bank withholds an amount equal to the interest
of P6,000.00. Thus the borrower will get only
94, 000 without considering the sales charges.
Relation of Loans to Deposits

Loans and deposits complement each other, as the amount
of loans a bank could extend will depend largely on its
ability to attract and retain large deposits. The earning
capacity of a bank will be enhanced when it has a large
available loanable fund. This could, in turn, only happen
when bank enjoys the public’s confidence so much so that
big amounts of deposits find their way into bank’s vaults and
eventually into loans and investments.
Types of Loans
1. As to purpose- loans may either be commercial, industrial,
agricultural, personal or other classification.
2. As to maturity- Loans are payable either short term,
intermediate or long term

Short Term – Less than one year

Medium Term/ Intermediate- 1 year above but less than 5 years

Long Term – More than 5 yearste or public and etc.
Types of Loans
3. As to security-loans are either secured or unsecured. Example
Title of property for guarantee.
 Secured-
a mortgage conveying title to property is used to guarantee
the payment of a loan
 Unsecured/clear
loan- the loan is granted due to the person’s good
character
This latter type may in some cases require a co-maker. But, the main
consideration for the granting of the loan would be on the character of the
principal debtor and the guarantor. Although a loan is secured, it may also
need co-maker.
Types of Loans
4. As to method of Payment-Self liquidating (proceeds or resale)
or non-self liquidating (comes directly from the income)
 Self-Liquidating-
means that the repayment of the loan will come
from the proceeds of resale or from the income derived from the use
of capital goods bought from the loan proceeds. Example: A to
purchase inventories which are eventually resold
 Non-Self-liquidating-
when the repayment comes directly from the
income of the borrower. Example: A personal loan since the proceeds
would be used for personal needs rather than business purposes.
Types of Loans
5. As to method of release-installment “lump sum” or a loan of
a sizable sum may be released in small amounts as needed
and whole amount
6. As to source- determine where the funds borrowed come
from, the loans are classified banks credit, mercantile credit,
private or public and etc.
Lines of Credits

A “line of credit” is being accorded to a bank customer. A bank uses such
favor as a policy of attraction to big depositors. It must, therefore, be a
special concession given to a select few, for it does offer several
conveniences for a busy businessman.

A line of credit is a flexible loan from a bank or financial institution. Similar
to a credit card with a set credit limit, a line of credit is a defined amount of
money that you can access as needed and use as you wish. Then, you can
repay what you used immediately or over time.

As with a loan, you will pay interest using a line of credit. Borrowers must
be approved by the bank, which considers credit rating and/or your
relationship with the bank, among other factors.
Credit Investigation

1. Investigation- The banks officer will be able to get the
necessary information and determine with some
precision the borrowers character, capacity, capital or
collateral.

2. Analysis- Test and measurements of Bank standards
are applied. Necessary information is used for the
analysis.

3. Filing- Connotes the regular meaning of keeping the
data in orderly arrangement. It is important so that bank
could keep abreast of the current credit standing of the
borrower.