Relation B/w Loans & Economy
The lending system plays an important role in the modern economy. This is because the bank & moneylenders act as a bridge between those with too much money and those short of money for all their needs.
Some people want to invest and then keep their money in the bank in the form of FD, RD even in a savings account and those facing a financial crisis come to the bank to borrow in the form of a loan. Some people borrow for their business needs, while others do it for their personal needs. In short, to meet their financial needs, people get loans from businesses and other corporations from banks.
As a result, banks & moneylenders serve as a pillar for most entrepreneurs, small business owners, and even workers. This makes loans easier to negotiate.
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Let’s understand this with an example
For homebuyers who are buying homes, their move at the beginning is impossible. But with the help of a mortgage, you can get your dream home by paying a small minimum payment and the rest can be paid in installments for a flexible working period of 20 to 30 years. At the same time, lenders make life easier for the general public, who sometimes face financial crises.
On the other hand, individuals, whether salaried or entrepreneurs, the middle class or corporations, and even the government save their savings on operating costs and development work. In this way, they earn interest on their money and get the same by keeping their money in the bank in the form of FDs, savings banks, and so on.
Inflation is a situation in which there is a general rise in the prices of goods and services in the economy. This has an impact on the reduction in consumer purchasing power. In this case, a lot of money is distributed immediately after the product.
To control the situation, the government raised interest rates on loans and deposits. This results in high-interest rates on loans. This reduces the loan rate and increases the number of savings and deposits. In this way, the money supply is reduced so that inflation can be controlled.
Deflation is a situation in which the prices of goods and services fall sharply. This situation is serious because it can have a negative impact on the economy. To control the situation, the government lowered interest rates on loans and deposits. This limits savings and entices people to take out loans which boosts the economy again.