Loans give rise to positive and negative effects on a country’s economy. Loans, when utilised properly, produce positive results on the economy but can also be harmful when utilised otherwise.

This writeup will point out the positive and negative effects which loans can create on the economy.



There are many positive effects of loans on the economy and we will discuss a few of them below.

Funds for Capital Investments

One positive effect of loans on the economy is that it is employed in capital investments which regulate business activities, giving rise to a general growth of the economy.

A business owner who acquires a loan to expand his/her business in turn (Read about how to get a business loan), provides more employment opportunities to citizens, which reduces the employment rate. Consumers also turn to loans to fulfil their personal and basic needs, which increases the country’s Gross Domestic Product (GDP) due to more spending.


Economic Deflation Control

In a situation of deflation in the country, the government reduces the interest rates on loans, which encourages business owners to acquire more of them. This condition stimulates consumption, limits savings, and as a result, deflation is controlled.


Increase in Production Activities

Investment loan allows a business owner to borrow money needed for all the necessary factors of production and other resources required to start the business. The revenue from this business would be used to pay employees as well as settle the loan. This ensures the production of commodities that would not otherwise have been produced. The increased productivity helps to pay back the loan and as a result, improves the economic status of the country.


Development of workforce

The United States government offers various loans to students who are citizens as well as international students. After their education, the students are allowed to work and are able to pay back their loan with interest. This boosts the economy of the country because apart from the interest they get from the students’ loans, the students also become able hands that join the workforce.


Development of Public project

Loans borrowed from banks; local and world bank, International Monetary Fund (IMF) by the American government are most times, used to carry out public projects that are of high importance to the economy. These projects may include public building construction, schools, road construction etc. The US government also loans money to other countries for security, treasury bonds etc, which adds to her economy.



As there a positive effects of taking loans on the economy, there are also many negative effects.

Instability in lenders finance

A business owner, not meeting up to loan repayment due to high interest rates creates instability of the lender’s finance which can also cause imbalance in the economy of the country.

Entrepreneurs tend to depend on these loans to foster their business ideas as they “initially” believe their ideas will be a success whereas the future of ideas are unknown. They collect loans from financial institutions to bring their ideas to reality and if it fails, it’s a detriment to the bank that offered them. 


Continuous Funding of failed businesses

Businesses tend to collect loans to expand their goods and services as loans from banks make their business dreams a reality. Whenever there’s a business that isn’t doing well due to lack of business management  or other reasons, the next plan is to take out a loan to foster a failing or financially dead business. The market fails it’s consumers as there’s no focus on consumer needs but rather a longevity of already failed businesses.


Loan wastage on personal bills

Some business owners depend on loans to foster their social well being. Instead of creating business developments that bring in revenue, they tend to depend on the loans to pay bills because they know they can always get it. 

It gets to a point of growth for them in making their business a figurehead whereas the loans collected are used in living the life they intend to live. Therefore, the businesses don’t grow and are stuck in a certain financial level thereby putting the economy in a stagnant and downward place.



 We have looked at different ways in which loans can be beneficial and detrimental to the economy. In summary, a country’s economy benefits from individual and business owners’ loans as long as they’re used judiciously. 

On the other hand, loans become harmful to the economy when individuals borrow more than they can pay. The banks may run into the risk of bankruptcy and as a result, reduce the economic growth of the country.


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