Loans

The term loan refers to a sort of credit vehicle in which a sum of money is given to another party in exchange for the value or principal amount being repaid in the future. In many circumstances, the lender will additionally add interest and/or finance charges to the principal value, which the borrower will be responsible for repaying in addition to the principal sum. Loans might be for a particular, one-time sum or an open-ended line of credit with a set maximum. A loan is made up of three parts: the principle, which is the amount borrowed, the interest rate, and the term, which is the length of time the loan is taken out for.

The majority of us choose to borrow money from a bank or a reputable NBFC since they are regulated by the government and are reliable. Any bank or NBFC (Non-Banking Financial Company) offers lending as one of their core financial products. Secured, unsecured, commercial, and personal loans are just some of the types of loans available.

According to the security provided, Loans can be divided as:

Secured Loans

These loans demand the borrower to put up collateral in exchange for the funds. If the borrower is unable to repay the loan, the bank maintains the right to pursue the delayed payment using the pledged collateral. When compared to unsecured loans, the interest rate on these loans is significantly lower.

Unsecured Loans

Unsecured loans are ones that don’t require any form of collateral in order to be disbursed. The bank considers the borrower’s previous relationships, credit scores, and other variables while deciding whether or not to provide the loan. Because there is no means to retrieve the loan amount if the borrower fails, the interest rate on such loans may be higher.

Types of Loans

Education Loan

Education loans are financial tools that help borrowers further their education. An undergraduate degree, a postgraduate degree, or any other diploma/certification course from a reputable institution/university can be used as the basis for the course. To be eligible for funding, you must have the institution’s entrance permit. Both domestic and foreign courses are eligible for funding. Many Indian banks and non-banking financial companies (NBFCs) provide low-interest education loans to assist educate the next generation of innovators and leaders.

International students can borrow up to Rs.1 crore, while local students can borrow up to Rs.50 lakh. After six months, the loan payback period might be extended to twelve years.

Personal Loan

You can take out a personal loan if you have a cash flow problem. A personal loan may be used for a variety of reasons, including paying off a debt, travelling on vacation, supporting a down payment on a house/car, and medical emergencies, as well as acquiring large-ticket furnishings or electronics. Personal loans are granted based on the applicant’s previous dealings with the lender as well as his or her credit score. A credit score is a three-digit figure that shows a lender how creditworthy you are. It outlines how you previously handled your finances and expenses. The lower your credit score, the less likely you are to acquire a favourable loan offer. It is advised that you check your credit score ahead of time to enhance your chances of acquiring the loan, and if it is poor, you should work on improving it before applying for the loan.

Home Loan

Home loans are used to finance the purchase of a home/flat, the building of a house, the renovation/repair of an existing house, or the purchase of a plot for the building of a home/flat. The property will be retained by the lender in this situation, and ownership will be given to the legal owner after the repayments are completed. The most significant advantage of a house loan is the income tax deduction available for interest and principal repayments. When compared to other loan kinds, the interest rate on a house loan is significantly cheaper. If you run out of money, you might be able to receive a cash advance on your existing house loan at a cheaper interest rate than a personal loan to remedy the problem. Home loans, unlike other types of loans, have a lengthier payback period of up to 25-30 years. This is due to the large loan amount required to acquire a home. The monthly EMIs will be lower if the loan amount and interest rate are spread out over a longer period of time, easing the strain on the borrower.

Recommended Read: Additional Home Loan Tax Deduction in Budget 2019 under Section 80EEA

Car Loan

Purchasing a car may provide you with a wonderful sense of excitement and satisfaction. A car will remain an asset and one of the most significant investments you will make. A vehicle loan can help you bridge the gap between your desire to possess an automobile and the actual purchase of one. Because credit reports are used to determine your loan eligibility, having a high credit score is advantageous when applying for a vehicle loan. The loan application will be accepted quickly, and you may be eligible for a cheaper interest rate. Applying for a vehicle loan has never been easier or more convenient. You may submit the automobile loan application form online in just a few clicks. Almost all banks now provide auto loans with low interest rates. It is now quite simple to obtain a vehicle loan and subsequently pay EMIs without depleting one’s financial resources, depending on one’s affordability.

Car loans are backed by collateral. If you don’t pay your instalments, the lender will repossess your vehicle and collect the loan.

The loan amount might range from 85% to 90% of the car’s on-road pricing. Under certain situations, certain banks will finance up to 100% of the vehicle’s on-road price. Also, if you buy a car from a dealer or manufacturer with whom the bank has a relationship, you may be eligible for additional discounts and offers.

Two Wheeler Loans

In today’s world, a two-wheeler is a must. Whether you’re going for a lengthy trip or commuting on a congested metropolitan street, bikes and scooters make it easy to get about. A two-wheeler loan is simple to obtain. This loan allows you to acquire a two-wheeler using the money you borrow. However, if you do not make timely payments and pay off your obligation, the insurance will seize your two-wheeler to recoup the loan amount.

Business Loans

Small Business loans are loans given to small and medium-sized firms to help them satisfy a variety of needs. These loans may be utilised for a variety of things that will help the company flourish. Paying staff wages, marketing expenditures, purchase of equipment, purchasing goods, meeting administrative expenditures, paying off business debts, or even opening a new branch or acquiring a franchise are just a few examples.

Gold Loan

When a borrower pledges actual gold, such as jewellery or gold bars/coins, many financiers and lenders give cash. The lender weighs the gold and determines the amount provided based on multiple purity tests and other factors. The money can be used for whatever you like.

The loan must be repaid in monthly instalments in order for the loan to be cleared before the end of the term and the gold to be returned to the borrower’s possession. If the borrower does not make timely payments, the lender has the right to seize the gold in order to recoup its losses.

Loan against assets

Individuals and corporations borrow money by pledging property, insurance policies, FD certificates, mutual funds, shares, bonds, and other assets, similar to pledging gold. The lender will give a loan with some margin based on the value of the pledged assets.

The borrower must make timely payments in order to retain possession of the pledged assets at the conclusion of the term. If the borrower fails to do so, the lender may liquidate the assets to recoup the money owed.

Some Favourable Factors Lenders Look Into Before Accepting Your Application

1. Credit score

The lender’s decision on whether to proceed with your application or reject it from the outset is mostly based on your credit score. When it comes to unsecured loans, this is especially true.

Because a credit score shows a borrower’s credit history, the lender examines the borrower’s repayment history to determine whether the borrower can repay on time or will default on payments. The lender’s decision is based on the results of the necessary analysis.

2. Employment History and Income

Your monthly or yearly income, as well as your job history, are important factors in loan acceptance. The lender may or may not be confident that you will be able to repay the loan based on your income and income stability in the form of consistent and steady job history.

Even if you are self-employed, the lender expects that your firm has been operating smoothly for a few years and that your turnover is sufficient.

3. Debt to Income Ratio

Not only does having a strong salary matter, but so does your debt-to-income ratio. If you earn Rs.1 lakh per month and your debt payback obligations exceed Rs.80,000, you will not be eligible for a new loan since you would need the remaining income to cover your household needs.

As a result, regardless of your salary, you must maintain a low debt-to-income ratio so that lenders believe you have enough cash on hand each month to make your payments and take care of your family’s needs.

4. Down-payment

The money you’ve saved and the way you’ve gone about saving for a down payment will boost the lender’s confidence in you. The smaller the loan amount required, the larger the down payment.

5. Collateral

The interest rate on your loan may be determined by the lender based on the collateral you offer and its current market value. Providing collateral will make the contract safer in the eyes of the lender, resulting in more confidence and a lower interest rate. Unsecured loans are notorious for having a higher interest rate than secured loans.

Added benefits and features of Loans

Loans are classified into different categories based on a variety of characteristics.

  • You have the option of selecting the sort of loan you want based on your needs and eligibility.
  • The lender will have the last say on the loan amount they desire to provide you, depending on a variety of criteria such as repayment capability, income, and other considerations.
  • Every loan will come with a repayment period and an interest rate.
  • Every loan may be subject to a variety of fees and charges imposed by the bank.
  • Many lenders provide rapid loans that may be issued in as little as a few minutes to a few hours.
  • The lender sets the interest rate based on the Reserve Bank of India’s guidelines.
  • The amount of security required is determined by the lender.
  • In some instances, a third-party assurance might be utilised instead of security.
  • The loan must be repaid in equal monthly installments during the loan’s predetermined period.
  • Prepayment in whole or in part may or may not be a possibility.
  • Prepayment penalties may be imposed by some loan types and lenders.

Eligibility for applying for a loan

The requirements for obtaining a loan vary depending on the sort of loan you want. In general, you can use the following easy criteria to determine your eligibility.

  • A good credit rating
  • Consistent revenue flow
  • At the time of the loan, your age must be between 23 years and 60 years. You must have a few assets, such as FDs, investments, immovable property, and so on.
  • A positive working connection with your bank
  • A track record of prompt debt payback

Required Documents

Applicants with SalaryApplicants who are self-employed
Request form with photographRequest form with photograph
Address and identity proofAddress and identity proof
Bank account statement over the previous six monthsBank account statement over the previous six months
The most recent pay stubBusiness proof
Form 161. Business profile
2. Returns on income (personal and commercial) for the previous three years· 
3. Last three years’ profit/loss statements and balance sheets

Applying for a Loan? How to do so?

Applying for a bank loan is easier than it appears. However, before applying for one, you should be conscious of your financial status, since you will be required to repay the loan amount at a later date.

You must first analyse your needs, and if you believe this is the best option for you, you may go to the bank and speak with a loan manager, or you may skip all of that and apply online.

Step 1: Based on your research, select the lender you’d want to borrow from and verify your eligibility.

Step 2: To apply for a loan, go to a bank office or go to their official website.

Step 3: Upload or submit all required papers and evidence.

Step 4: The bank will review your application and contact you within the specified time limit to advise you of their decision.

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