Criteria A

How Banking Systems Work & What is a Loan?

Nita Vasadze

The banking system is the backbone of our modern economy, offering a variety of financial
services that affect the lives of individuals and businesses alike. They control the flow of money.
One of the pivotal functions within this system is providing loans, a financial tool that can be
both a great opportunity and a potential threat. This research will delve into the workings of the
banking system, the various types of loans available, and their impact on individuals and the
economy.

Banking systems:
The banking system is a comprehensive network of institutions, regulations, and technologies
designed to provide financial services, including the operation of payment systems, providing
loans, accepting deposits, and assisting with investment activities. It plays a vital role in
facilitating funds transfer, allocating capital, and managing financial transactions within the
economy. The banking system includes banks and other financial institutions that work together
on each of these services. For example, banks, credit card unions, investment companies, and
insurance companies. They all provide different products, however, are all part of the banking
system because they help individuals and entities manage their finances, properties, or other
material goods.

Hence, how do they work in actuality? The core function of the baking system is to act as an
intermediary between those who need funds and those who have excess funds. When
individuals or entities deposit money in a bank that money is gathered and used by the bank to
provide loans to borrowers. The bank makes money by charging interest on each loan, which is
mostly higher than the interest they pay to depositors. In addition, the government ensures the
stability and integrity of the banking system, safeguarding the interests of both borrowers and
depositors. And, the third one is that they play a crucial role in the growth of the economy which
will be explained in depth later in the report.

One of the most important part that banks have is their role in the economy. First of all payment
system support. Banks act as coordinators, establishing the guidelines for equitable
transactions when making purchases or payments. They are the ones who make sure that
everything goes according to guidelines and our money is safely stored. Whether we use cards
or mobile apps to pay banks serve as the gatekeepers, ensuring our funds are directed to their
intended destination. The second role is the one that has been already mentioned. Them being
the intermediary between borrowers and depositors.

Products:
Banks alone, provide many products. Some of them are savings accounts, checking accounts,
and loans. A savings account represents a deposit account that earns interest over time. While
interest rates on these accounts are usually modest their reputation for safety and dependability
make them a practical option for keeping funds readily available to meet short-term financial
needs. Checking accounts on the other hand are also known as demand accounts or
transactional accounts because they serve as deposit account that facilitates convenient
withdrawals, transfers, and deposits. They are available through ATMs and mobile apps, and
they are mostly used for the short term. The last and one of the most important products of
banks are loans.

Loans:
The term loan itself refers to a sum of money, property, or other material goods that is lent to an
individual or other entity in return for future repayment of the principal amount or value, plus
interest or other financial charges. These interest and financial charges are not fixed and
depend on the type of loan and the lender. There are specific, one-time amount loans with fixed
dates of full repayment, and on the contrary, there are open-ended line of credit that can be
drawn on repeatedly, up to a specific pre-approved amount, but have no set end date for full
repayment. Open-ended credit can be taken mostly from banks or other financial institutions
and the most common example is credit cards. In addition, loans can be secured or unsecured.
Secured loans have collaterals, for example, mortgages, thus there are lower risks of the
borrower not returning it. However, unsecured loans have much higher risk and because of this,
their interest rates are higher.

Applying for a loan:

To apply for and take out a loan, an individual or an entity has to go through different steps and
processes. First, the borrower might have to provide details on why they want the loan, their
financial history, their Social Security number, and other information about themselves. The
company goes over this information and examines its income to decide whether the borrower
can repay the debt or not. If all of the information is creditworthy then the lender approves the
loan. Before exchanging money or property, both parties decide and agree on the terms. In the
loan paperwork, the lender specifies any collateral requirements and lastly, a contract is signed
by both the borrower and the lender.

Interest rates:
When taking out a loan, the interest rate is one of the most important part to consider. It is a
percentage of the amount borrowed that is added when paying back the lender. The ultimate
cost and duration of the payment both depend on the interest rate. Therefore, a loan with higher
interest will take higher or longer monthly payments to pay off. There are two types of interest
rates, simple or compound. Simple interest is the interest on the principal loan and it never
changes.

However, compound interest is defined as “interest on interest”. This means that it is interest on
loans calculated with both the principal loan and the accumulated interest from previous
periods. For example, at the end of the first month individual who took out a loan owes a bank
principal loan plus interest, but at the of the second month, they owe principal and the interest
for the first month plus the interest on interest for the month year. The interest owed with
compounding is larger than with the simple interest approach since interest is levied monthly on
the principal loan amount, including interest accumulated from prior months. For shorter
periods, both approaches calculate interest in the same way. The difference between the two
methods of interest estimates widens as the lending period lengthens.

Types:
Furthermore, loans have many different types. For example, personal loans, student loans,
mortgage loans, auto loans, etc. Personal loans do not have a specific purpose like others do,
they can be used for anything an individual chooses. Many use it for emergencies or home-
related projects. Most of the time, personal loans are unsecured and interest and repayment
terms are not fixed. On the other hand, mortgage loans have a very specific purpose. They
cover the price of a newly purchased home minus any down payment. This loan is secured and
the home itself is the collateral. If the loan is not repaid according to the requirements, the
lender will take the home’s ownership. Mortgage loans are usually repaid over 10 to 30 years
and are not insured by government agencies. Interest depends on the lender of the loan. For
example, someone can take out a mortgage loan to purchase his first home, and if they can not
repay the loan in time they will lose this home. Another very common type of loan is the student
loan. They help students pay for universities and colleges. They are insured by private lenders
and the federal government. However, federal government student loans are much more
popular and desirable because of their terms and conditions. They have income-based
repayment plans, do not require credit checks, and offer much more forgiveness which lenders
lack. For instance, when students struggle with paying for school and dorms, they take this out
and pay it for a very long time.

Purpose:
Consequently, loans are used for many purposes. Some of them include investing, business
ventures, renovation, major purchases, etc. They help many of the already existing companies
to grow and expand their operations. Correspondingly, giving loans to new businesses
increases the competition in the global market and this allows growth of the overall money
supply.

Formula:
For each type of loan formula for calculating monthly payments varies. For example, mortgages
n
Pr (1+r )
and student loans have the same formula which is - M = . Where M is the monthly
(1+r )n
amount the borrower has to pay, P is the principal amount, both in dollars. r is the annual
interest rate and n is the number of payments in months. On the other hand, for a personal loan
to calculate first we have to get the interest, which is I =P ×r ×t , where I is the interest rate, P
is the principal amount, r is the annual interest rate, and t is the months. And then the total
amount to repay is P+ I . For compound interest, we have a different formula as well,
nt
r
A=P(1+ ) , where A is the total amount including the interest, P is the principal amount, r is
n
the annual interest rate and n is the number of times that interest is compounded per unit t , and
t is the time money is invested for in years.

Advantages and disadvantages:

Based on everything that has been said before it is clear that loans have both advantages and
disadvantages. Some of the advantages are that it can help people in crucial moments, if there
is an emergency, people are not left astray and can always rely on it. Additionally, it can elevate
people's lives and help them take new steps in life. Most importantly, it increases competition in
the market by helping new businesses form. On the other hand, the disadvantages are that it
can damage people's lives severely if they do not pay back the loan in time. For example,
people can lose their homes or they have to pay loans for the rest of their lives because of
student loan terms and conditions.

In conclusion, banking systems are key parts of the financial system, controlling the flow of
money and offering different products. One of them is a loan, which consists of three parts, a
principal amount of money, interest rates, and time period. There are many types of loans and
they can both help or destroy people's lives.

Bibliography

Barone, Adam. 2019. “The Ins and Outs of Banks.” Investopedia. 2019.
https://www.investopedia.com/terms/b/bank.asp.

Chen, James. 2022. “Principal.” Investopedia. April 21, 2022.

https://www.investopedia.com/terms/p/principal.asp.

Fernando, Jason. 2019. “Compound Interest Definition.” Investopedia. 2019.

https://www.investopedia.com/terms/c/compoundinterest.asp.

Hayes, Adam. 2021. “Learn about Simple Interest.” Investopedia. March 23, 2021.
https://www.investopedia.com/terms/s/simple_interest.asp.

Hayes, Adam. 2022. “Financial Institutions: What We All Need to Know.” Investopedia. February
2, 2022. https://www.investopedia.com/terms/f/financialinstitution.asp.

Horton, Melissa. 2019. “What Are the 9 Major Financial Institutions?” Investopedia. 2019.
https://www.investopedia.com/ask/answers/061615/what-are-major-categories-financial-
institutions-and-what-are-their-primary-roles.asp.

Rivera, Heidi. 2023. “How to Calculate Loan Interest.” Bankrate. October 5, 2023.
https://www.bankrate.com/loans/personal-loans/how-to-calculate-loan-interest/.
Kagan, Julia. 2018. “Savings Account.” Investopedia. 2018.
https://www.investopedia.com/terms/s/savingsaccount.asp.

Kagan, Julia. 2019. “Loan – Definition.” Investopedia. April 19, 2019.

https://www.investopedia.com/terms/l/loan.asp.

Karen Axelton. 2021. “8 Different Types of Loans You Should Know.” Www.experian.com.
October 13, 2021. https://www.experian.com/blogs/ask-experian/types-of-loans/.

The Economic Times. n.d. “What Is Loan? Definition of Loan, Loan Meaning.” The Economic
Times. https://economictimes.indiatimes.com/definition/Loan.

Criteria B

Loan Calculator App

Description of the application:

Collecting data
My app is a calculator that calculates three types of loans, student, mortgage, and personal.

● First of all, it asks the user which type of loan they want to calculate.
● The user has to input 1, 2, or 3. One represents student loan, two mortgages, and
three personal - this will be stated in the question, thus they will understand easily
and their input will be easily understandable. If they had to input the words “student”,
“mortgage” or “personal” there could be many exceptions, for example, capital letters
and typos. Therefore, I thought that entering a number would be most appropriate.
● If they still enter the wrong thing, the application will output “Please enter again” and
instructions.

The next part includes asking about different elements of their loan.

1. First, ask about the principal amount and indicate that the money should be in Lari.
(Output: Enter the principal amount in Gel)
2. Then the interest rate, which will be in percentages. (Output: Enter the interest rate %)
3. Next, a time period which has to be imputed in months (Output: Enter the interest rate
%)
4. Lastly, ask about how much income they have per month (Output: Enter your monthly
income in Gel)

Calculating
Then in the first question if the user had chosen a student or mortgage loan with this formula -
n
Pr (1+r )
M= . Where M is the monthly amount, the borrower has to pay, P is the principal
(1+r )n
amount, both in lari. r is the annual interest rate and n is the number of payments in months.
The program will calculate the amount the user has to pay each month.

If a user had chosen a personal loan in the first question, then it will use this formula I =P ×r ×t
, where is the interest rate, P is the principal amount, r is the annual interest rate, and the
months. Do that calculation and then calculate the amount to repay monthly which is(P+ I )/m .
Thus, the personal loan formula has two parts.

Output
After calculating using these formulas output there will be two outputs. One, if their income is
less than their monthly payment for loan output will be “Amount of money you have to pay is
more than your income, therefore we do not advise taking out this loan”. If their income is more
than their monthly payment for a loan only then the output will be in a table that will include all of
the information that the user has inputted and how much they have to pay monthly. The table
will look like this:

Loan Type Principle amount Interest rate (%) Time period The amount you
(Gel) (months) have to pay each
month (Gel)

Input of the Input of the second Input of the third Input of the Calculated amount
first question question question first question

Screenshots from the presentation:

Mind map
Criteria D

Implementation

To make an application that calculates loans I had to thoroughly understand the concepts and
functions of it. Therefore, I started by researching banking systems, their purpose, how they
work, and what products they offer. This led me to loans, the most important product of banking
systems. I found out, the advantages and disadvantages of loans, their part in the economy,
and most importantly how they work. There are many types of loans and different formulas for
each one of them. I decided to implement three types of loans which are most used and
popular. These were mortgage, student, and personal loans. Through my research, I discovered
that mortgages and student loans have the same formula and personal has a different one.
Thus, I considered this part while writing the code for my application. After I had enough
knowledge and information about the subject itself I started to think about how my application
would work. First, I made an outline. It would start with the user choosing the type of loan, then
inputting the information needed for calculating, next would be the actual calculation process
and last would be output. After making this outline, I started working on making each part more
detailed. Choosing the type one seemed the easiest but then I realized how many mistakes the
user can make while inputting the information. For example, there could have been
capitalization problems or typos. Thus, decided that I would tell users that they have to input 1,
2, or 3 instead of the words and I would add the function that if a user still imputed words, it
would write “error” and make them input number again. The next part is the one that turned out
to be easiest, which is just asking the user for information about the loan they want which is the
principal amount, time, and interest rate. However, while doing my research about loans I found
out how much of a risk a can loan be if the user does not have enough of the income.
Therefore, in this part, I also ask the user about how much their income is to use this
information later and give them advice. After this, I had to write a code that would calculate
these loans, which was the most challenging part for me because formulas are very complex
and I had to be very careful with it. Lastly, the output. I wanted the output to be as nice as
possible and not just plain numbers. In the part, teachers' recommendations and tips were very
helpful. I made I table which has all the imputed information and calculations in it and
additionally, if their income was less than the calculated amount, I gave the user advice to not
take out this loan.

Success

As for the success of my application, in my opinion, it is pretty successful. To make this

conclusion I tested my application and inputted all kinds of information. I tested each type of
loan, inputted different numbers, and calculated it on my own to know that it was calculating
each loan correctly. I checked if it told you when the user inputs words instead of numbers in the
first question and it recognized the problem right away and told me to input a number again.
However, I later realized that if you input any number but one, two, or three it does not catch the
mistake. This is the part of my application that is a problem that I would like to resolve in the
future. Nonetheless, I think that the application is still successful because it gives users what
they need in a very understandable and pleasant output, which is a table, and additionally gives
them advice if they should or should not take out this loan or not.

Further improvements

First of all, one improvement that could be made is the one that I already mentioned, as of now
when the user inputs words instead of 1, 2, or 3 it can identify that it is wrong and output an
error, however, when the user types other numbers it cannot recognize the mistake. This should
be the first improvement. Then, more types of loans could be added to the application for it to
become more diverse, and more people could use it. For example, auto loans and small
business loans. Additionally, it could have a compound interest formula as well.

Furthermore, making it available for everyone and this app being on the web would be very
helpful. Right now, the only people who can open this are users with the whole project file and
IntelliJ IDEA on their computers. If it was available for everyone that would make it more useful and popular.
One more thing that could certainly be improved in this application is the implementation on the front end. For
people to use this app it should have an appealing design, which is essential for every application, but as of
now, mine lacks it because I have only been working on the back end, but for the future improvement design
would be crucial.

Impact on the target audience

Firstly, the target audience of this application is adults who are taking out a loan and need help
understanding how much they will have to pay monthly. My application’s impact on the intended
audience is that it encourages responsible financial planning and decision-making. It helps them
plan their financial decisions more effectively and then stress less about it. It contributes to
increased financial literacy by visualizing the impact of different loan parameters. Users not only
understand the immediate impact of their loan choices but also gain insights into financial
principles, creating a sense of financial understanding.