What is loan? Best ways to get loans in India.

If you don’t need a loan and you have received a call from telemarketers, then you will be irritating. But do you know what this loan is after all? Why is it being provided so easily now? What are the different types of loans? If all these questions are arising in your mind then you must read this article. Here we are going to provide full knowledge on loan.

Whenever the thought of loan comes, then the picture of banks definitely emerges in the mind. And why not, in today’s time if you want a loan then you have to go to the banks only.

 If the loan is understood in easy language then it can be any item, but mainly it is understood as money, it is taken from some other person, while returning it, along with the principal amount, interest is also need to be return.

What is loan?

The loan is the most important primary financial product of any bank or NBFC (Non-Banking Financial Company) that they offer to the common people. In this way, it is an act or work in which money, property or any other material goods are first provided to a needy person, and collected along with the interest after a certain period of time.

Loan makes our life easy. In today’s time, the direct connection of the loan is with the banks. This is probably because banks are the only financial institutions that provide you loans with interest. At the same time, they provide you loans soon in a very safe and secure way.

If you have never taken a loan then you probably do not know much about its importance. Because when there is a great need of money, such as for the treatment of a major disease, for getting children married, for building your house or for the education of your children, then in such situations loans are the only support.

 Because it is very difficult to have such a huge amount with anyone, whether it is a friend or relative, such a large amount cannot be demanded from them. Now the only way left is to take a loan from the bank. Loans are a very useful thing in times of need, but whereas if you are unable to return it, then it is best to stay away from it.

What are the components of a loan?

There are mainly three components of the loan, which are follows

1. Principal or borrowed amount

2. Rate of interest on loan

3. Tenure of the loan

Principal or borrowed amount:

Whenever you take a loan from someone, whether it is a bank, a financial institution or a person, then whatever amount you take from them, is called Principal Amount or Loan amount. This is the principal amount that has to be brought back and interest along with it.

Rate of interest

Now let’s talk about Rate of Interest, this is the interest rate that gets added to the principal amount as time passes. By the way, no one will give you money without interest, so whatever interest comes along with your loan amount, in the end when you go to return the loan, it is called the rate of interest amount.

Tenure of the loan

Now know what the duration of the loan is, as if you take a loan from someone, then he will never promise to return you, but he puts a time limit in front of you within which you have to return his money, This is called the loan duration or tenure of the loan.

Categories of the loans

Loans are broadly divided into two categories, one is secured and the other is unsecured.

Let us now know about the categories of loans

1. Secured –

A secured loan is called that loan which is backed by collateral or security that too in the form of assets such as property, gold, fixed deposits and PF (Provident Fund).

For example, if you took a home loan or an auto loan, a lien is created in your property and you cannot sell it until you have repaid the entire loan amount and you Can claim sole ownership of the house and vehicle.

2. Unsecured –

An unsecured loan is called that loan which is a type of personal loan and which does not require any collateral, security or guarantee and it can be taken to fulfill your needs.

Banks or NBFCs provide these loans to you without any security and together they only look at your CIBIL score and personal track records.

Types of Loan

There are many types of loans available in India some of these are as follows.

Home Loan – Unsecured

Car Loan – Unsecured

Education Loan – Secured

Personal Loan – Secured

Business Loan – Unsecured

Gold Loan – Unsecured

1. Personal Loan

A personal loan is called that loan which is availed by the individuals according to their needs. These loans are more useful when unexpected expenses arise in front of you. These loans are usually taken from a bank or a non-banking financial company (NBFC).

2. Education loan

The importance of quality education is the highest for all the students and for this they can go to any extent. As we know that the cost of education is increasing day by day. In such a situation, education loan is the only way left.

Education loan is the loan that students apply to fulfill their educational requirements. Almost all banks and NBFCs offer education loan in India.

3. Home loan

Buying or building a house is a very big dream of all Indians, while they definitely want to fulfill it. In such a situation, the entire capital deposited in building a house is sacrificed, while sometimes it also falls short. In such a situation, if we want to fulfill the dream, then we see the only way to take a home loan.

You can take a home loan to buy your new home, to renovate it, to buy land, etc.

4. Car Loan or Vehicle Loan

Everyone wants a good car or vehicle, but we do not have enough money to buy it in a long time. Although buying a vehicle is considered a matter of self-respect, it also has many advantages such as it gives you the flexibility of transportation, increases your convenience and functionality.

In such a situation, if you want to take a car loan, then you can easily take it because there are many banks that offer car loans with attractive interest rates along with other benefits. Whereas if you do not want to repay together then you can take the option of EMIs to repay the loan.

5. Business Loan

Businesses need a lot of investment to run smoothly to pay their start-up expenses or business extensions. For such works, companies have to take business loans for their financial assistance.

This is actually a loan which has to be returned to the company after a specific tenure. You can take these business loans for many purposes such as for starting a new firm, for business expansion, for financing dealer and vendor etc.

6. Gold Loan

Gold loan is a type of secured loan, whereas this loan is provided by banks in exchange for gold collateral. Banks provide loans to the borrowers as per their requirement but in return they keep their gold jewelry and coins, while they return it when you return the amount taken. But it doesn’t hurt much to take it.

7. TERM LOAN

Term loans are called those loans which are mainly taken for business purposes and they have to be returned within a specified time frame.

1. It typically has a fixed interest rate, which has to be returned in a monthly or quarterly repayment schedule – and a maturity date is also set in advance. This is a secure type loan.
2. A secured term loan usually has a lower interest rate than an unsecured one.

Classification of Term Loans
Long Term	<3years
Medium Term	1-3 years
Short Term	1 Year

Types of Loans According to Taking Them

1. Open-ended loans

2. Closed-ended loans

Open-ended loans

These are the loans that you can take again and again. Credit cards and lines of credit are the most common types of open-ended loans. In both these types of loans, you have a credit limit against which you can purchase.

Every time you make a purchase, there is a reduction in your available credit. This is because the credit limit is fixed. At the same time, as you make payments, then your credit limit also increases so that you can take the same credit again and again.

 Closed-ended loans

These are the loans that if you take it once, then you are able to take it again only after you have paid it. Here too, as you keep repaying the loan amount, your loan balance also increases, but you cannot take any more loans in this. Rather, you can take the loan again only after paying the full loan amount.

If we talk about the example of closed-ended loans, then it includes mortgage loans, auto loans, and student or education loans.

Types of loans according to their repayment period

If we classify the loans according to their repayment period, then the name that comes in it is revolving loans or term loans. Revolving means that you can take, spend, return and spend this loan again. The biggest example of this loan is credit card.

Some important concepts related to loans

1. Income:

The main concern of lenders (who provide loans) is your repayment capacity. In such a situation, fulfilling the income requirement of the bank is the most important thing for any loan applicant. Therefore, the higher the income, the easier it will be to apply for big loans that too for a long time.

2. Age:

A person who still has more working-age left on his side will find it easier to get a long-term loan approved as compared to an adult person or an fresher one.

  3. Down payment:

  This is the loan applicant’s share towards the payment for which he has applied the loan. For example, if you have purchased a car for Rs.10 lakh and the bank has promised you Rs.8 lakh, the remaining Rs.2 lakh is called Key Down Payment. This is paid by you.

4. Tenure:

This is called the time frame that is given to you to complete the loan. If you are not able to repay it within that time limit, then you also have to fine for this and your collateral things can also be confiscated.

5. Interest:

This is the amount of interest that the person taking the loan has to pay along with the principal amount. Interest rates vary from one loan to another. At the same time, sometimes from one person to another because it also depends on their credit scores.

6. Equated Monthly Installments (EMI):

This is called the monthly repayment amount that the borrowers of the loan have to return to the bank within the pre-determined time limit. In an EMI, both the principal + interest are kept together and it is divided equally in that time frame.

Advantages of Loan

There are many features and benefits of loans some of these are as bellow.

1. Having Financial Flexibility: Loans provide you financial flexibility. It provides you financial help in your time of need. On the other hand, by taking a loan, it also provides you some degree of financial freedom and also handles your everyday expenses properly, while not moving your planned budget here and there.
2. Easy availability: All types of loans are mostly approved within 48 hours, provided you have already submitted all the required documents. So they can be easily obtained.
3. Receiving the amount needed: On the basis of your income and financial history, you get the money you need.
4. Having a Convenient Tenure: While taking the loans, you can choose the time frame within which you can repay the loan. Most of the time, you get loans from 12 months to 60 months.
5. Benefit in Tax Benefits: According to the Income Tax Act of 1961, you get the facility of tax benefits in almost all types of loans.

main reasons of getting a loan

There are many reasons to getting a loan but, some main reasons are as listed below.

1. To Fulfill Life Goals: When you want your life goals to be fulfilled and for this you need a little financial assistance, then you need a lot of loans.

2. Having Immediate Financial Requirements: We do not even know when what will happen to someone, so at such a time you can apply for a loan if there is a financial emergency.

3. To do any financial arrangement properly: If some such incident happens in front of you about which you do not know anything, then you can apply loan at such time, because you do not want If there is any kind of obstruction, then things should go smoothly.

What are the things to keep in mind before applying for a loan?

It is an easy thing to take a loan, but before that you must pay attention to some things because for this you may have to repent later. Let us look at some such aspects.

Credit score: Before applying the loan, you must check your credit history once. This credit history is a type of record which shows the investment made by you, the loans taken and the repayment record already. This will show to any bank how your previous track record is and whether you should really give loan or not. By the way, a good credit score of 750 or above is considered.

Rate of Interest: Make sure to check the loan interest rate once before applying for the loan. Because loans that require collateral have lower interest rates than loans that do not require them.

Processing fee and other charges: If you apply for a loan and you miss your loan payment deadlines, then you have to pay a processing and penalty fee. These fees and charges depend on the loan amount and bank.

Do research to get the best rate of your loan: Research and compare with different banks; From NBFCs so that you can know about the best interest rates, EMI, tenure and other charges.

Best ways to take loan easily

First of all, do not forget to make sure that the loan should be taken only when it is absolutely necessary. Always try to keep the loan amount as low as possible. If you are not able to repay the loan amount on time, then you may fall into the debt trap.

 1. Take loan from your employer

Many companies give a loan to the employee as an advance for a part of the salary. This can be up to six times your monthly salary. You can pay this amount from your salary for the next 24 months.

Interest Rate: 5-8% (Sometimes this interest rate can be zero.)

Benefits: You can get this amount in three days.

Disadvantage: This is a part of your salary, according to this you will have to pay tax on it.

2. Home Loan Top Up

You can take a loan of up to Rs 50 lakh as a top up home loan for tenure of up to 20 years. If the tenure of your home loan is short, then the loan will be available accordingly.

The total value of the mortgage and top up loan cannot exceed 75% of the value of the house.

 Interest Rate: 9-13%

Benefits: You can get this loan in three days

Disadvantage: If you make any default in repaying the loan, then you will have to pay a huge cost.

If you want to know more about home loan then you must read this article on home loan.

3. Personal loan

You can get this loan within 30 minutes to three days. It depends on your relationship with the bank. If you have a pre-approved loan offer on your account, then the process becomes very easy.

Interest Rate : 13-24%

Benefits: Instant payouts when you take a personal loan from your bank

Disadvantage: 2-3% is charged as processing fee. Apart from this, you have to pay GST on monthly installments.

If you plan getting a loan from PNB then this article on PNB personal loan may helpful for you.

4. Loan against property

If you have a house and you want to take a big loan, then you can take a loan from the bank against that property. In this way you can take loan from 5 lakh to 10 crore rupees. In this, the tenure of the loan can be from 2 to 15 years.

Banks give you loan up to 65% of the value of the property. For this it is necessary that the house is insured. In this, the processing fee is 1.5-2% while the fee for premature repayment of the loan is 2-3 percent.

Interest Rate : 9.5-13%

5. Loan Against Shares

 You can also take a loan against your shares, mutual funds, fixed deposits or insurance policies. In the case of mutual funds and shares, banks give you a loan of up to 50% of the investment amount. In case of fixed deposits, you can get interest up to 75% of the investment amount. Interest Rate : 9-15%

Advantages : Quick Payout, Low Interest Rate Disadvantages : If the value of the portfolio falls, you will have to keep more funds with the lending institution.

6. Loan against gold

You can also take a loan against gold or gold ornaments kept with you. Banks can give you a loan of Rs 10,000 to Rs 25 lakh against the value of gold. Usually the repayment tenure of the loan ranges from 6-12 months. When you repay the loan amount, you get back the gold pledged.

Interest Rate: 10-17% from Bank, 14-26% from Non-Banking Finance Company

Benefits: Loan is available in few hours.

What is the 4 C’s of a loan

1. Character

It means the complete financial history of the borrower. Meaning that how is the person taking the loan, how is his previous behavior etc. The credit score is used to see this thing.

2. Capacity

It means the ability of the business so that it can generate so much revenue that the loan amount can be repaid. In other words, capacity shows the ability of the borrower (who takes the loan) to get the loan repaid. If the bank gives a loan to a new business, then it is the most risky for them.

3. Capital

It means the capital assets of the business. Capital assets include the company’s machinery and equipment, along with product inventory, store and restaurant fixtures. Banks always take special care of how the capital of the company is because if the loan is not repaid then they have to sell these assets, whereas if they cannot meet the loan amount, then there is a loss of the banks.

4. Collateral

It means the cash and assets that a business owner pledges to secure his loan. Even if your credit score is good, while you are also generating good income, even then banks want you to keep all your assets with the bank on the side of security, so that the bank’s loss will be less if you cannot repay the loan.

Faq on Loan