About Loans.

About Loans - Money Matters.

A loan is a financial assistance which a bank gives to its customers who are in need of money. Everybody needs money. The day to day requirements of money is met by the earnings of the previous month. However, when the money required is huge which cannot be met by earnings alone, we need some source to meet that demand.

The Need for Funds.

Money is needed for purchases and for the usual expenses that we incur everyday. We have to manage our expenses through our monthly income. If our expenses are more than our income for the month, then we have to withdraw from our savings. As we cannot rely on our savings all the time, we have to find out some alternative source for funds. The need for funds is never ending. Small requirements can be met by making adjustments here and there. This usually means short-term borrowing from friends and relatives or liquidating small deposits. Bigger requirements cannot be met with small adjustments. These can be met only through positive input of funds.

Importance of Loan.

When we need huge amount of money, we seek a loan. A loan helps us to undertake our business, or our projects or the needs that require money without affecting our savings much. Consider a scenario where we need huge sum of money for a personal purpose. If this demand can be met from our savings and if we use the money from our savings, we may achieve our goal without being in debt but at the same time, our savings will get reduced or will get depleted depending upon withdrawal. On the other hand, for the same purpose, if we take a loan, we could achieve our goal without depleting our savings.

The Role of Banks.

Banks are the most important source for loans. Banks give loan for almost every purpose. If a customer is genuine, getting a loan is easy. For a bank or a financial Institution, giving a loan is a business. A bank needs customers who can take loans and can repay without any default. While banks are always looking for customers who need loan, they also look for the eligibility of individuals or firms seeking loans. Banks can't disburse loans by overlooking the eligibility criteria because it is risky for them.

Eligibility for Loans.

To be eligible for a loan, a person should have an income which should be adequate and regular. This is the most important point for the bank to consider before granting loan because regular income is the edifice on which the repayment will depend. If a person earns adequate amount of money every month, then he can certainly pay the EMI and this is what a bank considers as important.

Banks generally ask for the proof of income from individual borrowers. They prefer borrowers who have a salary account with them as this helps them to establish the source and proof of income easily.

The other eligibility criteria is age. Banks give loan to them who are in the working age group which is usually 21 to 60.

Secured Loans.

When a bank lends money by considering the eligibility of the borrower, there is still a risk involved in it for the bank. The risk increases with the increase in the principal amount. To counter this risk, the bank asks the borrower to provide something valuable as a security which will be kept in the banks custody till the entire loan is cleared. This kind of loan is called a 'Secured Loan'. In short, secured loans are those which are provided by the lender against a collateral security. Through secured loans, the lender reduces its risk by securing valuable assets of the borrower.

Secured loans are available for many purposes like for building a house or for refurbishing the house, for buying a vehicle like a bike or scooter, a car or an SUV or any vehicle for our personal use. We can also get a loan for buying commercial vehicles like a car or jeep (to be used as taxi), a bus, a lorry or any other vehicle for commercial use. We can get a loan for buying agricultural or farm equipment like tractors and tillers.

Unsecured Loans.

When a bank gives loans without any collateral security to its existing customers who have good record of loan repayment, then such a loan will be called an 'Unsecured Loan'. In this no collateral security is required. The example of an unsecured loan is a personal loan.

A person should have good credit score to qualify for an unsecured loan. He should be a good customer of the bank with regular transactions. Trustworthy customers are always preferred by the bank for unsecured loans.

Advantages of Borrowing from a Bank.

Borrowing from a bank has some advantages. When we borrow from a bank and pay the EMI on time, we increase our credit score. The credit score is what every bank and every lending company looks for to ascertain the track record of the borrower. If the credit score is good, getting a loan will be easy. This will not be possible if we borrow from an individual.

Banks have simplified the lending process. It is now possible to get a loan without visiting the bank. We can apply for a loan from our home through internet banking or through mobile applications and can get the money credited to our savings account within minutes if we are eligible for it.

The other advantage of borrowing from a bank is the ease of loan repayment. We don't have to go to the bank every month to pay our EMI. We can give a standing instruction to the bank to debit the EMI from our account. This is convenient because this removes two apprehensions of the borrower -

(1) Missing an EMI if they are unable to go to bank and

(2) forgetting to pay the EMI.

The borrower has to ensure adequate balance in his account for the EMI.

Other Source for Loans.

Other than banks, there are some reliable sources from where we can get loans. One source is the Non Banking Financial Company (NBFC). NBFC is not a name of a particular company; its a non banking sector which deals with financial products and there are many companies which come under this category. They are private companies dealing with financial products and they give loans for various purposes just as a bank does.

Life insurance too offers loans on some selected policies. In life insurance, we get the loan against a set percentage of the total premiums paid. For this, the policy holder should have an active life insurance policy with an inbuilt facility for loan.

Major Lenders in India.

When we talk about major lenders, we known that banks will always be the undisputed leaders in this space. The majority of lenders are banks in terms of  scale and volume. Here are some, very popular names in the lending business.

(1) STATE BANK OF INDIA: The State Bank of India is the largest bank in India with the most number of branches. The SBI is the largest lender and also the most popular. SBI provides loans for all purposes. They offer home loan, business loan, loan for education, car and bike loan, personal loan, loan for home renovation etc. With yono app, you can check offers for loan and submit your application if you have one, and get it effortlessly.

(2) PUNJAB NATIONAL BANK: PNB provides loan for buying home, for buying automobile, for education and so on. PNB used to give personal loans, but now it focuses mainly on secured loans.

(3) BANK OF BARODA: BOB offers loans for home renovation, for buying new home, vehicle loan etc.

(4) HDFC BANK: HDFC provides home loan, car loan, bike loan, personal loan etc. HDFC offers personal loan in 10 seconds to customers who qualify for it. The bank disburses the amount in 10 seconds when the customer submits the application online.

(5) AXIS BANK: Axis Bank provides home loan, vehicle loan etc.

(6) UNION BANK OF INDIA: The Union Bank offers loan for home renovation or purchase, vehicle loan etc.

(7) ICICI BANK: The ICICI Bank provides home loan, car and bike loan etc.

Risks in Borrowing.

Borrowing is always considered risky because we get involved with the lender with an obligation to pay the entire amount we receive along with its interest within a certain period of time. If we borrow money from a friend or somebody who is kind to us, we may get some concession if we face any problem in repayment. This flexibility will depend on how close we are with the lending person. This will not be the case if we borrow money from a bank or any financial institution. There is no room for any consideration of any kind in case of any problem faced by the debtor to repay his dues if the lender is a bank or a financial company.

Management of Loans.

The fund from a loan has to be used very cautiously. If it is not a personal loan, then it is not recommended to use the money for personal expenses. Loans can be managed through adequate earning, timely repayment of dues, by controlling expenditures and by saving regularly. We should control our expenditures at all times but more particularly when the loan account is active.

To go for a loan or not is a decision which is personal for an individual. Taking a loan is not dangerous if we know its principles well and if we are comfortable with it. A loan is like a motor car. A motor car has many utilities and is purposeful for a good driver but is dangerous for them who don't know how to drive.

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The previous post was about "Our Assets".

The next post is "About Investments".

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