What are Loans?
The loan is the financial help provided by one entity to another in terms of property, cash, material, goods or credit. In layman terms, it is how one entity lends financial help to another. The system of taking and giving loan exists from the time we established barter system.
The system of loan works on the basic principle of giving benefits to the money lender as well as the money recipient. While the money lender gains interest on the amount that he lends, the money recipient can use the money to fulfil his short/long term purposes. Interest is the extra fee that the money lender charges. The recipient needs to pay back the loaned amount to the lender with the added fee at the end of the agreed term.
In several cases the parties involved in the transaction sign a legal contract that binds them to lend/receive money in the stipulated amount of time. The contract also specifies the collateral in case the money recipient is unable to pay back the money in the stipulated amount of time. Under this situation, the lender is free to use the collateral as he/she pleases.
The financial institution of the world has seen several changes over the past couple of years. One of the major changes is the rise of banks. The money lenders have now established lending money as a way of business and the earnings that they receive, as a method of paying their daily bills. Banks are the most coveted financial institutions known for granting loans to the people as well as offering security,for a small amount of interest,on their hard-earned money.
A bank usually offers different types of loans depending upon the needs of the person. These loans are classified into different types based on the rate of interest, thetime period of the loan or the principal amount offered.
Types of Loans
You can apply for a loan for several purposes. Banks classify the different types of loans based on the needs of the individuals. Some of the different types of loans offered by the banks include,
- Personal Loan - A personal loan is the type of loan given to an individual and not to a company/business. This loan is given to an individual to help him carry out bill payments or purchase of an article. The interest rates on a personal loan fluctuate based on the repayment time, the loan amount as well as the bank. The interest rates can fluctuate from 11% to 22%.
- Home Loan – Home loans are given to individuals who want to invest in a property or to buy a house. These loans are associated with a long repayment period as well as theshort term of loans. Home loans usually carry a smaller rate of interest for large principal amounts because of a larger repayment period. The period can last from anywhere between 2 years to 20 years depending upon the principal
- Car Loan – As the name suggests, you can get a car loan for buying a car. Usually, the banks do not offer the complete price of the car as a loan. Instead, the banks prefer that you invest some of your money for buying the car. It is easier to get a car loan for a new car than it is to get a loan for a second-hand or used car. The amount that you get for a loan depends on the price of the car itself.
- Two-wheeler Loan – Two-wheeler loans work just like car loans. The only difference is that these loans are applicable to the purchase of a two-wheeled Again, getting a loan is easier if you wish to purchase a new vehicle over an old/used one.
- Education Loan – Education loan is a slightly different type of loan as the repayment method is different. An education loan repayment period starts when the recipient of the loan starts earning. For example, if a student takes a loan from a bank, his/her repayment period will start from the time he/she get the first salary. The bank will automatically deduct the fixed amount from his salary as a part of loan repayment.
- Loan on Credit Cards – The use of credit cards is equivalent to the use of cash. The bank grants you a small amount of loan for a specific period, say for a month and you can pay the amount back the next time you get the salary. There is usually very less or no interest on this amount since it is a relatively small amount and a smaller repayment period.
- Business Loans – Business loans again differ in the method of repaying the loan amount. The business/company takes a loan from the bank and repays the amount over a long period from the profit that it earns. The business loans can last for years and can go up to several crore rupees.
- Line-of-credit Loans – Line of credit loans work just like credit cards. A person is eligible for a loan once again after he/she has repaid the previous loaned amount. The line of credit loans is one of the most popular types of loans since you do not need to file documents again and again for theloan. Instead, theline of credit loans is considered as a type of fixed income for investment in a business or a property.
- Secured and Unsecured Loans – Collateral is a term used for securing your loan against an amount with the bank. For example, when you are taking a loan, you need to provide a failsafe to the bank, a property/asset, that they can take over in case you are unable to repay the amount in the stipulated period. When you provide a collateral to the bank, you get a secured loan and get an unsecured loan otherwise. The rate of interest for a secured loan is significantly lesser than for an unsecured loan.
- Mortgage Loans – Mortgage loan is similar to a home loan. In the case of a mortgage loan, the property that you intend to buy with the loan is part of the collateral. In case you are unable to pay back the amount to the bank, the property which you invested in, is liable for foreclosure.
Top Banks Offering Loans in India
Almost every bank has the capability to offer a loan to its clients. Some of the major banks in India that offer the loans include,
- State Bank of India (SBI) – SBI is one of the largest banks in India. It is known for providing impeccable internet banking services and ATMs on every other corner. It offers various kinds of loans. However, the SBI Home loan is one of the most popular categories of loan that the bank currently offers.
- ICICI Bank – ICICI Bank is too known for hosting a lot of ATMs in India. The bank is known for housing one of the most customer friendly teams. ICICI Bank is famous for offering low-interest rate two-wheeler loans to its clients.
- HDFC Bank – HDFC Bank is famous for offering a variety of credit cards. It also offers all the different types of loans present above, to its customers.
- Kotak Mahindra Bank – Kotak Mahindra bank is the bank that came into limelight for the first bank to offer a 6% interest rate on savings bank account. While the other banks were offering a maximum 4% interest rate on savings account, Kotak Mahindra Bank was the first one to offer a 6% interest rate with some conditions applied.
- Axis Bank – Most of the corporate bankers prefer having axis bank account since it has a dedicated portal for a corporate account. You can create a corporate account with Axis bank to for your business to carry out all the business transactions through a singular account.
Other major banks that you can rely on for a loan include,
- Oriental Bank of Commerce (OBC)
- Yes Bank
- Punjab National Bank (PNB)
- City Union Bank (CUB)
- IndusInd Bank
Every bank has different criteria for granting loans to an individual/company. We will now see the basic eligibility criteria as well as the documents required that you will require for applying for a loan.
Who Can Apply for Loans? (Eligibility Criteria)
Banks are really careful in giving out loans to people. They usually do not give out loans to people who have a bad credit history. In case you have a really good credit history, you will be able to secure a loan in the minimum amount of time.
A credit score is a score on which the bank judges your loan repayment capabilities. In case you are regular with your loan repayments, rent payments, bill payments, etc. you have a good credit score and can easily secure a loan with the bank.
A good credit score will also allow you to secure a higher amount of loan from the bank. Although a bank may not completely refuse to give you a loan, it will usually hesitate in giving you a large sum of theloan if you have a bad credit history. If you have a steady income and/or an asset that you can place for collateral with the bank, you are eligible for the loan. A good credit score is an added benefit. You must also have an account with the bank for applying for the loan.
List of Documents Required for Loans?
The list of documents that you require when you apply for a loan changes from bank to bank. Usually, the banks ask for the following documents.
- Identity Proof – Pan Card, Driving License,
- Proof of Residence,
- Bank Statement – For the account where you deposit your salary,
- Salary Slips for the past 3-4 months,
- Passport Size photographs.
You might also require additional documents such as office address proof, collateral papers, credit score, etc. depending upon the type of loan you are applying for.
Benefits of Availing Loans
When you avail a loan from a bank, you get the following benefits,
- Long repayment period,
- Instant cash,
- Low rate of interests,
- Chance to develop a good credit history,
- Proper documentation for the loan and agreement.
You can avail these benefits when applying for a loan at a reputable bank. It is always better to go with a bank which has a good reputation over a bank that offers lower rates of interest.