We may not always have the money we require to buy certain things or to do certain things. In such situations, individuals and businesses/firms/institutions go for the option of borrowing money from lenders.
When a lender gives money to an individual or entity with a certain guarantee or based on trust that the recipient will repay the borrowed money with certain added benefits, such as an interest rate, the process is called lending or taking a loan.
A loan has three components – principal or the borrowed amount, rate of interest, and tenure or duration for which the loan is availed.
Most of us prefer borrowing money from a bank or a trusted non-banking financing company (NBFC) as they are bound to the government policies and are trustworthy. Lending is one of the primary financial products of any bank or NBFC offers.
Types of Loans
These loans require the borrower to pledge collateral for the money being borrowed. In case the borrower is unable to repay the loan, the bank reserves the right to utilize the pledged collateral to recover the pending payment. The interest rate for such loans is much lower as compared to unsecured loans.
Unsecured loans are those that do not require any collateral for loan disbursement. The bank analyses the past relationship with the borrower, the credit score, and other factors to determine whether the loan should be given or not. The interest rate for such loans can be higher as there is no way to recover the loan amount if the borrower defaults.
Different Types of Bank Loans in India
Most banks offer personal loans to their customers and the money can be used for any expense like paying a bill or purchasing a new television. Generally, these loans are unsecured loans. The lender or the bank needs certain documents like proof of assets, proof of income, etc. before approving the personal loan amount. The borrower must have enough assets or income to repay the loan. In the case of personal loans, the borrower gets to know about the denial or approval of the loan within a couple of days.
You should remember that the rate of interest associated with the personal loan can be on the higher side. The tenure of these loans is not that long. So, if you borrow a big amount, it can be difficult for you to repay without planning your finances properly.
Personal loans can prove to be of great help when you wish to take a small amount loan and repay it as soon as possible.
Credit Card Loans:
When you are using a credit card, you must understand that you will have to repay for all the purchases you make at the end of the billing cycle. Credit cards are accepted almost everywhere, even when you are traveling abroad. As it is one of the most convenient ways to pay for the things you buy, it has become a popular loan type.
In order to apply and avail a credit card, all you need to do is fill out a simple application form provided by the card issuer. You can also choose to apply for a credit card online. These plastic cards come with great rewards and benefits. It’s the loan where you need to repay on time but you are also handsomely rewarded for using it.
Obviously, there are pitfalls associated with this type of loan. You must understand that there is a high amount of interest on the amounts you borrow on your credit card. If you do not pay your credit card bills on time, the interests will keep piling, and might be difficult for you to manage your finances with the rising outstanding balance. But if you use a credit card wisely and clear all your debts on time, it can definitely prove to your best friend in your pocket.
Education loans are financing instruments that aid the borrower pursue education. The course can either be an undergraduate degree, a postgraduate degree, or any other diploma/certification course from a reputed institution/university. You must have the admission pass provided by the institution to get the financing. The financing is available both for domestic and international courses.
Vehicle loans finance the purchase of two-wheeler and four-wheeler vehicles. Further, the four-wheeled vehicle can be a new one or a used one. Based on the on-road price of the vehicle, the loan amount will be determined by the lender. You may have to get ready with a downpayment to get the vehicle as the loan rarely provides 100% financing. The vehicle will be owned by the lender until full repayment is made.
Home loans are dedicated to receiving funds in order to purchase a house/flat, construct a house, renovate/repair an existing house, or purchase a plot for the construction of a house/flats. In this case, the property will be held by the lender and the ownership will be transferred to the rightful owner upon completion of repayments.
A gold loan can be used to raise cash to meet emergency or planned financial requirements, such as business expansion, medical emergencies, education, agricultural expenses, etc. The loan against gold is a secured loan where gold is placed as security or collateral in return for a loan amount that corresponds to the per gram market value of gold on the day that the gold has been pledged. Any other metals, gems, or stones that are in the jewelry will not be calculated when determining the value of the gold loan.
Agriculture loans are loans that are provided to farmers to meet the expenses of their day-to-day or general agricultural requirements. These loans can be short-term or long-term. They can be used for raising working capital for crop cultivation or to buy agricultural equipment.
Consumer Durable Loan
Consumer durable loans are loans that are availed to finance the purchase of consumer durables such as electronic gadgets and household appliances. Depending on the lender, they can be used to buy anything from mobile phones to Washing Machines. Loan amounts range from Rs.5,000 to Rs.5 lakh. There is no security deposit required usually. Some lenders offer 0% interest on consumer durable loans with instant approvals and minimal documentation required as well.
Loan Against Mutual Funds and Shares:
Certain lenders provide loans against your mutual fund value and share value. However, you will not be able to borrow huge amounts under this type of loan.
Home Renovation Loan
Home innovation loans are offered by most lenders. These can be availed to meet the expenses related to renovation, repairs, or improvement of an existing residential property. Depending on the lender, there is a lot of flexibility with what you can do with a home renovation loan. You can use it to buy products or pay for services. For example, you can use it to pay for the services of a contractor, architect, or interior decorator. You can also use it to buy furniture, furnishings, or household appliances such as a refrigerator, washing machine, air conditioner, etc. It can be used for painting, carpentry, or masonry work as well.
Important Factors Lenders Look at to Approve your Application
Credit score plays an important role in deciding whether the lender would like to go ahead with your application or drop it off at the initial stage. This is especially the case when it comes to unsecured loans.
Since a credit score represents the credit history of the borrower, the lender analyses the repayment history of the borrower and concludes whether the borrower can repay on time or will he default on payments. The loan approval is based on the lender’s judgment after the necessary analysis.
Income and Employment History
Your monthly or annual income and employment history plays a crucial role in loan approval as well. Based on your income and income stability in the form of consistent and stable work history, the lender may or may not get convinced that you will be able to repay the loan.
Even if you are self-employed, the lender assumes that your business is running well for the past few years and your business’s turnover is satisfactory.
Not just having a good income, your debt-to-income ratio is also important. In case you have an income of Rs.1 lakh per month and if your debt repayment commitments exceed Rs.75,000 already, a new loan will not be provided to you as you will need the remaining income to take care of your domestic expenses.
Therefore, irrespective of your income, you must have a low debt-to-income ratio so the lenders can think that you have enough cash at hand every month to make the repayments as well as handle the family expenses.
Based on the collateral you provide and its current market value, the lender may decide on the interest rate applicable to your loan. Providing collateral will make the deal more secure from the lender’s perspective, which may result in more trust and less interest rate. An unsecured loan is infamous as it includes a higher interest rate comparatively.
The money you have saved and the effective execution of your saving plan towards a down payment will increase the lender’s trust in you. The higher the down payment, the lower is the loan amount requirement.
Features and Benefits of Loans
- There are several types of loans categorised based on various factors.
- You can choose the type of loan you wish to take based on your eligibility and requirement.
- The lender will be the ultimate power to decide the loan amount they wish to offer to you based on several factors, such as income, repayment capacity, and others.
- A repayment tenure and interest rate will be associated with every loan.
- Many lenders provide instant loans that take a few minutes to few hours to get disbursed.
- The interest rate is determined by the lender based on the Reserve Bank of India’s guidance.
- The lender determines the requirement for security.
- A third-party guarantee can be used instead of security in some cases.
- The loan repayments must be made in equated monthly instalments over the pre-determined loan tenure.
- There may or may not be the option for full/part prepayment.
- Some loan types and lenders may levy a penalty for prepayment of loans.
Eligibility for Loan
The eligibility criteria to get a loan varies based on the type of loan you are looking for. Generally speaking, you may consider the following simple criteria to check your eligibility.
- A decent credit score
- Constant income flow
- A few assets such as FDs, investments, immovable property, etc.
- Age between 23 years and 60 years at the time of entry
- A timely debt repayment history
- A good relationship with your bank
Loan EMI Calculator
A Loan EMI Calculator is a handy tool to calculate the monthly amount payable to the lender as well as the total interest. To calculate the EMI applicable to your loan amount, all you need to do is enter the values for principal Amount (P), Time duration (N), and Rate of interest (R).