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What Is Loan?

A loan is when one receives finance from a bank, friend, or some finance entity with the assurance of returning it in the future along with the principal as well as the interest. Principal is the borrowed amount, and interest is the charge on receiving the loan. Considering that lenders take a risk by offering you the loan facility and the fear that you may not be in a position to repay the same,, they have to protect the losses by charging an amount in the form of interest.

Mostly loans are categorised as secured or unsecured. Secured loans pose the need for promising an asset such as a car or house as a loan collateral in case the borrower defaults, or does not repay the loan. In this case, the lender gets the possession of the asset. Unsecured loans are sought after, yet less common. In case the borrower fails to pay back an unsecured loan, lender cannot take anything in return.

Everything You Need to Know About Loans

There are various kinds of loans as per the financial requirements in question. Banks can give a loan which can be secured or unsecured. People go for secured loans due to lower interest rates and the large sum of money available which can be used forpurchasing a car or house. While unsecured loans are most common in the form of personal loans which have a higher interest rate and are given for smaller amounts for purposes like home renovation and so on.

The maximum loan amount that you can avail is based on the persons’ collateral capacity and credit report. Instruments of credit like credit cards, standard loans, line of credit.

Two active distributions in consumer credit is the open-end and closed-end credit.

The open-end credit, is also known as the revolving credit and this can be used repeatedly for purchases that have monthly pay back, in a setting where paying back the complete due amount every month is not required. A highly used form of revolving credit is the credit card, although home equity loans and home equity lines of credit also belong in this category. On the other hand, a closed-end credit is utilised to finance specific objectives for a given period of time. These are also known as instalment loans since consumers are required to go through a regular payment schedule which is monthly and inclusive of interest charges, until the time principal gets paid off.

Advantages & Disadvantages of a Bank Loan


Flexibility: A bank loan allows one to repay as per convenience as long as the instalments are regular and timely. Unlike an overdraft where all the credit is deducted in go. Or a consumer credit card where the maximum limit cannot be utilised in one go.

Cost Effectiveness: When it comes to interest rates, bank loans are usually the cheapest option compared to overdraft and credit card.

  • Profit Retention: When you raise funds through equity you have to share profits with shareholders. However, in a bank loan raised finance you do not have to share profits with the bank.

  • Benefit of Tax: Government makes the interest payable on the loan a tax-deductible item when the loan has been taken for business purpose.


Hard Prerequisite: Since big finance from a bank is based on collateral, most young businesses will find it hard to finance the operations based on bank loan.

  • Irregular Payment Amounts: Over a long duration payback via monthly instalment might witness variation in the rate of interest. This means that the EMI will not be constant, rather it will change as per the influence of the market on the interest applicable.

Types of Loans in India

Personal Loan –Mostly, all banks offer personal loan. . The good thing about personal loans is that one may spend this money however one likes. This personal loan amount can be utilised to go on a vacation, purchase Jet Ski or buy a new smartphone. Credit card Loan – This is meant for users who need money quickly. You may avail this type of loan from your credit card carrier or any financial institution. . This is an easy to get credit with very high rates of interest.

Student Loan – This is a great option to assist college education. Most common loans in this category have very reasonable interest rates. As full-time college student you don’t have to payback these loans immediately. However, the same needs to be paid back once you complete your education and start work.

Mortgage Loan – These are the largest amount loans one will ever get. When you plan of buying your first home or some real estate, this loan is the right option. Mortgage loans are secured by the entity you are purchasing from.

Home-equity loan – Owners of homes may borrow against equity which they have in their house with such loans. The loan amount is the difference between the appraised home value and the amount you owe on the mortgage.

Car loans- A car loan is nothing but an amount that you as a consumer borrow from the banks or financial institutions in order to pursue your dream of buying a car. In return, you pay the approved loan amount at a specified interest rate. A complete payment to the car dealer is made by the bank and you as a consumer continue to pay the bank over a period of time together with interest and any applicable fee.

Two-wheeler loans – The two-wheeler loan works on the sample principle as the car loan. Two wheelers being one of the most sought-after commuting options bring about highly affordable down payment and interest options that make two-wheeler loan possible for millions in the world. A two-wheeler loan can be availed with as less as 5 % to 20% down payment amount.

Secured Loan vs Unsecured Loan

Secured loans are a type of loans that are offered by financial institutions wherein an asset is required as a security deposit or as a collateral. These may include gold, house, etc. Loan against property, car loan etc,.are few examples of a secured loan. These assets guarantee assurance to the lenders in case of non-repayment of the loan availed. These are a great method of obtaining large amounts of capital.

Unsecured Loans are short-term loans that have no attached guarantee. Mostly these are given as per your credit record and financial status. Unsecured credits include credit cards, personal loans etc. Due to the high risk associated with this type of credit, the interest rate is more.

What Makes a Loan Critical?

One should understand that the loan is a liability. This means that the lender has in her/his possession, the company’s asset. A loan re-payment which is due in one year from total repayment are mostly tagged as a short-term debts on a company balance sheet. Loan re-payment that is due for more than one year is thought considered as a long-term debt. It is critically important to note that most loans come to focus when liability is considered, but most liabilities are not loans. Most companies incur various other liability types, including upcoming payroll, bonuses, legal settlements, vendor payments, certain derivatives, contracts, various types of leases, and much needed stock redemptions.

Data regarding an individual or company’s debt is an essential element to derive accurate financial report. Too much debt showing on your reports will definitely ruin an enterprise or individual’s credit standing for some years to come.

Criteria for Applying for a Loan

Various financial institutions has varying criteria for loan applications as per the type of loan availed. However, there are some standard criteria:

  • The individual should be 18 years or older age
  • Valid ID
  • Give details of Bank account
  • Proof of residence
  • 3 - 6 Months’ salary slips
  • Proof of income

Availing a loan is an important responsibility of the borrower that requires full attention and timely repayments of the principal as well as the interest. . Remember that various factors comprise the amount requiring re-payment.

Duration – The loan duration is another factor when deciding on the cost of your loan. The longer it takes to pay off your loan, the more will be the interest you pay.

Loan Type - The type of loan you decide on will also impact your interest rates, a secured loan, usually contains lower rates, compared to an unsecured loan.

Credit – Your credit record will determine your loan rates. When your record of credit is sound and it is reliable, then you get to incur lesser interest.

In the same way, when your credit record is not good, then it will be harder for you to get an effective loan, with your interest rate standing a higher ground.

Inflation – The inflation rate is the rate at which prices increase in the economy. This impacts your credit rating in a major way. When you take a loan, it is important to understand your date for repayment. If in case you haven’t signed for a stop order, it is important that the monthly payments are made on the correct date for the duration of the entire loan period. In situations when timely repayments are not made or if the amount paid is not complete, there are various penalties that you will face:

  • A bad credit record.
  • A higher interest rate.
  • Reduced chances of applying for another loan.
  • An additional late payment fee.

Frequently Asked Questions

What are the different types of loans?

There are various loan types as per customer requirement.

  • Personal Loans
  • Cash Advances or Credit card loans
  • Student Loans
  • Mortgage Loans
  • Home-equity loans and lines of credit
  • Car loans
  • Two-wheeler loans

How loan works?

When you apply for a loan and also receive an approval for the same, the lender transfers the amount in lumpsum. This amount has to paid in equal instalments without defaulting. An agreement is signed by the borrower agreeing to the terms and conditions of the loan applied for.

Can you get a loan with bad credit?

Yes. Though you may not get the perfect loan by your credential, you might get a loan you require with a co-signer with a healthy credit history. At the same time, you may work towards improving your credit to improve your chances of getting a loan.

What are the two types of loans?

There are the two major loan products categories. Unsecured loans, such as personal loans, can be used to refinance high-interest-rate debt etc. Secured loans, such as a home equity line of credit, are secured by collateral and may provide you with an alternative to an unsecured loan at a lower interest rate.

Is it better to pay off a loan early?

True. If one has extra money available, paying debts is quite often a great idea. Besides the psychological benefits of zero debt, you enjoy major financial benefits.

How do you calculate a loan payment?

The best way to calculate a loan and the EMIs related to it is by using the calculator available on the website of the Bank or NBFC or the Finance Company. These calculators provide a complete and correct picture related to EMI as per the prevailing interest rates and correct estimates can also be received related to any change in interest and EMIs.

How does a secured bank loan work?

Secured loans are a type of loans that are offered by financial institutions wherein an asset is required as a security deposit or as a collateral. Gold or home is usually used as security deposit in order to avail this type of loan. . Here rates of interest tend to be lesser than with unsecured loans.

How can I get approved for a loan?

Most often, a credit score of 700 or plus is considered decent enough to get approval for a loan. The higher your credit score, the more likely you will be eligible for an approval.

Can you get a loan without a bank account?

There are certain options for loans without a bank account. Yet, they are less common.