How money lending helps the economy?

Money Lending also known as financing occurs when money, property, or any other valuable asset is given to the borrower by the lender, under the guidelines that the borrower will repay the lender or return the asset while following certain terms and conditions. The said lenders usually include government or financial institutions such as banks and credit unions. These banking systems act as a bridge between candidates with surplus assets and those facing a financial crisis. Know more at https://creditempire.sg/

 

Understanding how credit expands the economy

Let’s understand how credit helps with the expansion of an economy with an example:

Say, what would you do if you want to build a Cafe but don’t have the capital? You would approach the bank for a loan and the bank will simply lend the money it gets from the depositors.

For instance, a builder has deposited $1 million of his earnings with the bank. This deposit would be provided to you as a loan. It leaves the bank with $0.

Now, you appoint the same builder to build your Cafe for $1 million. He then deposits the amount as his earnings to the bank. He now has $2 million in his account, while in reality; the bank has only $ 1 million in its vault. The remaining $1 million is to be paid by you as a debt. The bank bridges the gap by simply ensuring that you pay your debt with interest once your business earns for itself.

Overall, the credit enabled $1 million to become $2 million in economic value.

 

During Inflation and Deflation

Inflation is a general increase in the prices of goods and services in the economy resulting in a decreased purchasing power of consumers. To control this situation, the government increases the interest rates on loans and deposits which helps in the reduction of borrowing percentage and increases the amount of savings and deposits. This can reduce the amount of money in circulation and help further control inflation. On the contrary to that during deflation, the government reduces the interest rates on loans and deposits which limits savings and attracts people to take a loan that contributes to the economy again.

 

The modern economy requires credit to promote economic activities. This credit allows businesses to invest beyond what they have in hand, aspirants to purchase homes without having to save the complete amount in advance, and also helps the government to smooth out their cyclical tax revenue patterns and invest in infrastructure projects. Hence, money lending is a crucial resource that helps the economic growth and overall prosperity of a country.