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07 Jul
  • Editorial Team
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It's always a good idea to know all about any financial services product before applying for one, this is especially true for Loans. Even a minor item could have significant financial emplications. This guide aims to introduce and explain some basic concepts pertaining to loans & financing; which may help you while searching for the perfect loan. Loans are primarily of two types, secured & unsecured. A secured loan is usually backed by a security or an underlying asset, which the financial institution takes over to recover its costs, in case the borrower fails to repay. For example, the hypothecation on ones car in caseof a car loan. Unsecured loans on the other hand aren't backed or secured by any underlying asset for example a personal loan or credit card debt.

Types of loans based on usage:

  1. Home loan: Money borrowed from a bank, NBFC or financial institution for purchasing a house or residential land.

  2. Student loan: Loans taken to fund one's education, usually for graduation/ post-graduation. The repayment for these loans starts a few months after completing the corresponding course or degree.

  3. Car/ two-wheeler loan: These loans facilitate the purchase of a car or two-wheeler (new or used), the vehicle in question is hypothecated to the financial institution from which the money is borrowed.

  4. Bill/invoice discounting: It is the process by which you can use your unpaid bills as a means of collateral for a loan.

  5. Working capital term or demand loans: These loans are intended to provide for working or operating capital needs of a business, and are very common among businessmen.

  6. Secured term loan: These are long term loans, secured against an underlying security or asset.

  7. Project/ acquisition finance: These loans are taken with the intent of funding a specific project or acquisition, and paid for by using the profits made on the said project.

  8. Medical equipment finance: Loans given out to buy new medical equipment or systems. Commonly taken by hospitals, nursing homes etc.

  9. Loan against property: Loans taken against an existing property are referred to as Loans Against property.

  10. Personal Loan: The loan granted to an individual based on one's salary and credit history. These are unsecured loans and they usually charge a higher rate of interest.

  11. Business Loan: Unsecured loans for business purposes are called business loans, they are the personal loan equivalent to personal loans.

Financial terms to know before you apply for a loan:

  1. Loan Tenure: The duration of a loan or term of a loan is the loan tenure; it could range from a few months to a several years.

  2. Accrued Interest: The interest amount that is due from the borrower, but it has not been paid is called accrued interest.

  3. Borrower Incentive Programs: Rewards (as gifts or offers) given out by banks to encourage and empower customers who pay the regular instalments on time.

  4. Cash Flow: The total amount of money transferred into and out of an institution or business which affects its liquidity.

  5. Credit Rating: The rating given to a company or an individual based on the financial history that helps determine the overall debt servicing performance of a company.

  6. Creditworthiness: It can be defined as one's eligibility for seeking credit, its determined by combining several factors such as cash flows, past repayment history, current debts, etc.

  7. Default: The instance where a failure to repay the loan or instalment occurs.

  8. Deferment: The instance where the customer is exempted from paying a loan or instalment.

  9. Delinquency: The borrower's failure to meet his/her obligations to the bank.

  10. Disbursement: The act of releasing funds to the borrower for seeking a loan.

  11. Electronic Clearing Service (ECS): Electronically transferring funds from one bank to another.

  12. Equated Monthly Instalment (EMI): The monthly payment that should be made by the borrower.

  13. Foreclosure: The procedure by which a person makes an earlier repayment and closes ones loan account.

  14. Hypothecation: The lien made by a lender on the borrower's property.

  15. Legal & Technical Fee: Fee charged from borrowers to validate the documents submitted by them.

  16. Loan Agreement: The formal document between the lender and the borrower.

  17. Loan Eligibility: The criterion used to assess borrower's eligibility for a given type of loan.

  18. List of Documents (LOD): It is a list of documents whose original copies are held by the lender for the duration of a loan.

  19. Loan to Value Ratio: The amount of loan as a percentage of the value of asset being purchased through finance.

  20. National Automated Clearing House (NACH): Used to make high-value high amount transactions in the country.

  21. No Objection Certificate (NOC): A legal document used to prove that the borrower is free from all his loan obligations.

  22. Non-Performing Asset (NPA): A loan account from where the possibility of principle or interest repayment is extremely low.

  23. Post-Dated Cheque: A cheque featuring a date later than the current date.

  24. Pre/Part Payment: The principle pre-payment made by borrowers before the actual due date.

  25. Processing Fee: The fee charged by financial institutions to process the loan application of the borrower.

  26. Rate of Interest (ROI): The percentage of interest charged on the borrowed money.

  27. Repayment Schedule: A detailed document having the repayment dates, the principal amount value and other client details.

  28. Statement of Account (SOA): A document which lists all inward/ outward movement of money from a given account.

What happens if you miss an EMI payment?

  1. Your credit rating will reduce.

  2. Your current Financial Institution will try to refrain from doing any further business with you.

  3. Penalty charges may be payable.

  4. Other Financial Institutions might consider you to be a risky prospect.

What happens if you can't repay your loan?

  1. The Financial Institute may try to restructure your loan.

  2. Legal proceeding may be initiated; the collateral is question would be sold to recover costs.

What is Balance Transfer (BT) or Loan Balance Transfer (Loan BT)

  1. Lower Interest Rates: You can have the lower interest rates of the new lender.

  2. Higher Loan Amount via Top-Up: One can get a high loan amount through top-up or additional funding.

  3. Longer Loan Tenure: The new bank can give longer tenure so that you can extend the period for your repayments.

  4. Better Terms & Conditions: Your new lender may give better terms & conditions in comparison to your previous lender.

  5. Superior Service/ Better Experience: One could switch to a lender who provides superior service or a better experience.

Benefits of Taking a Loan

  1. Tax benefits: Interest amounts are deductible in taxation.

  2. Greater returns: You will have greater returns on equity if used in conjunction with debt funding.

  3. Convenience: Taking a loan has never been easier.

  4. Easy availability: If your paperwork is in order then you can a get loan within a few days.

The loan lifecycle:

To know more about particular loan type or gain additional information, please refer to any of our earlier blogs, mentioned below:

  1. A ready guide on how to buy the best motorcycle

  2. Choosing the right financier

  3. Quick guide to mortgage loans

  4. What is bill or invoice discounting?

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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