Loans
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Loans in India

An act of lending property, money or other material goods to another person in exchange of future repayment of principal amount plus interest or any other type of finance charges is known as loan. It is a contract agreed by two parties and the terms and conditions, rate of interest and other charges along with the principal is informed at the initial stages. Most loans have a limit for the loan period, loan amount and interest rate. Loans are provided by banks, NBFC, government and corporations. Interest generated from these loans and fee received are the main source of income for those who give money as loan. More about types of loans, interest rate factors, eligibility and documentation is explained below.

The main two types of personal loans available in India are secured loans and unsecured loans.
a. Secured Loans: Secured loan is where there is a need for guarantee or security against the sum borrowed like a fixed or movable asset. In case of default of the loan amount, ownership of the security will be taken over by the bank. Usually car loans and mortgage loans are secured loans. The interest rate of these types of loans will be comparatively less as the risk for the lender is low even though there are many other factors that decide the rate of interest.
b. Unsecured Loans: Unsecured loan does not require any security, but the lender will charge a high rate of interest on the money borrowed. In case of default, the lender will seek legal assistance for the loss incurred. It is just as higher the risk of the loan, higher will be the rate of interest.

All You Need to Know About Loans in India

Here is your handy guide to understanding Loans

Factors That Decide Your Eligibility for a Loan:

Banks offer loan only if the individual is meeting all eligibility criteria. Among the long list of factors that makes an applicant eligible for loan, few important ones are mentioned below:

  • Age Criteria: The younger the applicant is there is more probability of getting loan. Most banks offer loan for salaried employees only if they are between the age group of 23 to 60 years. However for self-employed this will change to 24 to 65 years.
  • Employment Stability: It’s a crucial aspect for loan consideration. Unless the applicant is salaried and employed for at least 2 years in the same profession or if the applicant is self-employed with minimum 5 years of total earnings loan will not be processed.
  • Credit Rating: Apart from the applicant’s company’s performance, individual credit rating has a lot of importance. Good credit rating will increase the chance of getting the loan with more flexibility on loan. Default payment records, fraudulent tracks, and outstanding loan, will reflect negatively on the applicant, this could lead to bank’s cancelling the loan request or will charge high rate of interest.
  • Financial Situation: For this factor, not just present status is considered, the past records of financial stability holds lot of value in deciding the eligibility for a loan.
  • Employer: If the applicant is working with an employer who has high reputation and impressive turnover, the credibility of the applicant will respectively increase. Being a part of reputed and high turnover companies is an asset for the applicant.

Documentation Required for Loans

  • Passport size photographs (including those affixed in loan application)
  • Proof of Identification: electoral id card / passport / driving license / pan card.
  • Proof of Residence: electoral id card / passport / electricity bill / telephone bill.
  • Proof of Business Address: In case of non- salaried borrowers.
  • Statement of bank account for the last six months.
  • Signature identification from present bankers.
  • Personal assets and liabilities statements in bank’s standard format.

For Salaried Employees:

  • Original salary certificate for last month.
  • DS certificate- Form 16 or copy of I.T. Returns for the last two financial years, duly acknowledged by I.T. Dept

For Self-Employed Individuals:

  • Three years I.T. Returns duly acknowledged by I.T Dept./ I.T. Assessment Orders for Computation of income
  • Copies of challans in respect of advance payment of income tax

What is pre-payment and part-payments of loan?

All of us would have heard about these two terms when it comes to taking a loan and not many still know the actual difference between the same. It is pretty and easy to understanding. Pre-payment is in layman sense being able to repay the complete outstanding loan amount even before the actual tenure of the loan. This is also called as pre-closure. Primarily the principal amount will be repaid along with the pre-payment charges. The pre-payment charges varies from bank to bank according to their policies, these charges will be intimated at the time of loan approval.
Another important doubt with regard to pre-payment is when can this be done during the tenure of the loan? While some banks will have just 6 months as the locking period, other have upto 12 months. After continuous EMI payment for the set time frame of 6- 12 months the total outstanding loan amount can be pre-paid. Along with this there will be some amount of pre-closure charges and this varies from zero to 5% on the outstanding loan amount from bank to bank. If you know to play the cards well, you can either choose a bank that has zero pre-payment charges or look out for the offers from reputed banks that give this offer to the customers at certain specific period.
On the flip side part-payment is just closing the outstanding loan amount partly. Say your actual loan amount INR 500,000 and 2 years down the line the balance outstanding is INR 300,000. If you are expecting to receive around INR 150,000 of surplus fund, this can be used to partly repay the loan amount. Thus your outstanding loan amount will drop to INR 150,000 and there will be a proportional change in your EMI and rate of interest on the loan. This is the easiest way to repay the loan amount even before the actual tenure and your exposure to risk also drops. There is option to pay any amount between 2 to 5 times of the actual EMI amount at least once a year as the part payment.

When you have some surplus funds, which loans should you pre-close first?

In case of surplus fund the loan with higher rate of interest has to be pre-closed first. The higher the interest rate is; most part of the EMI amount will be flowing towards the interest of the loan instead of the principal. Thus the thumb rule is to pre-close the loan with higher rate of interest. The sooner you pre-close a loan with higher interest rate, higher will be the benefits. Of course, there will be some charges for the same which the borrower will have to incur but this amount is comparatively lesser than the actual interest you would end up paying until the complete tenure of the loan. Also it is said that home loans are generally cheaper, but before taking a decision compare all the outstanding loan interest rates and then make a wise decision.

Do’s & Don’ts of a Loan:

Just as everything has dos and don’ts, the same is the case of loans. The below list will help you understand the same.

Do’s:

  • Never borrow more than what is required: This can lead you to pay interest for unnecessary debts. It is essential to consider all requirement for a loan, sum up the amount requirement and then start looking for loan option, interest rates, monthly EMI, tenure etc.
  • Borrow what you can afford to repay: Taking loan that you will struggle is pay is not a good idea. Before taking a loan, make a thorough calculation of how much you will be able to pay.
  • Use the Money for Necessities: Taking a loan ‘just because it is easy to get one’ is the worst idea. Avoid putting yourself into debt. Be clear why a loan is required and stick to the plan.

Don’t:

  • Jump into Payment Protection Insurance: Check if there is a need for PPI and even if there is a requirement; take it from an independent company instead of the loan provider.
  • Ignore the Policy and Procedures: It is worth you spending an hour extra now to read the guidelines provided bank instead of later regretting. Ignorance of terms is not an excuse.
  • Miss Payments: Though it sounds obvious, don’ts list will be incomplete without this point. Missing or delaying one single payment will reflect on all aspects of your financial life. Apart from the extra interest that is required to be paid, you will end up having weak credit rating score.
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