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Loans

Giving a loan or loaning means lending money from one individual or entity to another. A loan has three components – principal or the borrowed amount, rate of interest and tenure or duration for which the loan is availed. It is one of the primary financial products of any bank or NBFC (Non-Banking Financial Company) offers.

Category of loans

Loans can be broadly categorised as secured or unsecured. Loans that are backed by collateral or security in the form of assets like property, gold, fixed deposits and PF among others are secured loans. If the bank or NBFC agrees to give loans without security and purely based on CIBIL score and personal track records, it becomes unsecured loans.  Loans are also classified on the basis of repayment period – revolving loans or term loans. Revolving refers to a loan that can be spent, repaid and spent again. A credit card is an example of this. And the loans paid off in equal monthly installments (EMI) over a pre-agreed period are called term loans.

Types of loans

The common types of loans that people avail are:

1. Home Loan
2. Car Loan
3. Education Loan
4. Personal Loan
5. Business Loan
6. Gold Loan

Important Concepts of a Loan

1. Income: Lenders main concern is your repayment capacity. So, meeting the bank’s income requirement is the most important criteria for a loan applicant. Higher the Income, easier the process to apply for larger loans with longer tenure.
2. Age: A person with more working-age on his side (but not without at least 2-3 years’ work experience) is more likely to get a long-term loan approved as compared to an older person closer to retirement or a fresher.
3. Down payment: This is the loan applicant’s share towards the payment for which he needs the loan for. For instance, if you are planning to buy a house costing 1 Cr, and the bank agrees to give you a loan of Rs. 80 lakhs, the remaining amount will be your down payment, which is Rs. 20 lakhs.
4. Tenure: This is the time allotted to repay the lender. If you fail to repay or miss an EMI, the bank can levy you fine or even seize your property.
5. Interest: This is the amount of money charged by the lender to the borrower for handing out a loan. Interest rates vary from loan to loan and sometimes even person to person based on their credit scores. You can opt for fixed interest rate (same throughout the tenure) or floating rate (changes as per the market).
6. Equated Monthly Instalments (EMI): This is the monthly repayment of a loan from a borrower to a lender. An EMI includes the principal + interest borrowed.

Features and benefits of loans

• Financial Flexibility: Loans allows you to meet a financial requirement or expenses you incur in life. Taking a loan gives you a certain degree of financial freedom as it equips you to make big payments or take care of one time expenses without upsetting your planned budget.
• Easy availability: All types of loans are approved as quickly as 48 hours based on details of income financial history of the borrower and in some cases the collateral to be attached.
• Get required amount: Based on your income and financial history, the amount you require as loan can be disbursed to you.
• Convenient tenure: The tenure of a loan is ample depending on the bank and amount. Loans are generally available for a tenure of 12 months to 60 months or even more.
• Tax Benefits: According to the Income Tax Act of 1961, almost all types of loans offer tax benefits which you can avail.

Why take a loan?

1. Life Goals: When you want financial assistance to make your life goals a reality be it a house, car or higher education.
2. Immediate financial requirements: You can apply for a loan when you have a financial emergency
3. To make financial arrangement for unforeseen expenses: If you are in an unforeseen situation where you have debts to clear such as social events, hospitalisation and so on; you can apply for a loan to make sure things go on smoothly.

Points to Consider Before Applying for a Loan

• Taking a loan is a big financial decision which requires you to make informed choices. Here are some:
• Credit score: Before you apply for a loan you need to check your credit history. A credit history is a record of your previous borrowings if any and repayment record. This will explain if you have been responsible for re-paying or have lapsed payments in the past. A credit score of 750 and above is great.
• Rate of Interest: Check the loan interest rate before you actually apply for one. Loans which require a collateral generally have lower interest rates than loans which don’t require.
• Processing fee and other charges: When you apply for a loan and if you miss your payment deadlines for your loan, you will be likely to pay a processing and penalty fee respectively. These fees and charges depend on the loan amount and bank.
• Research to get the best rate for your loan: Research and compare from different banks & NBFCs to get the best interest rates, EMI, tenure and other charges that best suit you.