In today’s world, a loan is like a financial lifeline that helps people and businesses to achieve their goals. It doesn’t matter whether you are looking to buy a house or start a business or a big company looking to invest more in business to grow even more; the loans give you the money you need to make your dreams come true. And the best part is that loans are not just for rich people; they help everyone, no matter if you are struggling with money or doing really well.
The loan process will not affect much based on the schooling you have had – loans are there to help both people who didn’t finish school (with some terms and conditions) and those with fancy degrees.
What is a Loan?
Sometimes, we all find ourselves in situations where we need a bit of extra money to fulfill the dreams we want, and that’s where loans come into play, which is like a helping hand from lenders. They give you the money you need, and in return, you agree to pay back not just the amount you borrowed but a little extra called interest.
If you are planning for a loan, there are important things to know about
- Principal Amount: How much you are planning to borrow,
- Rate of Interest: When you borrow money from a lender, they don’t do it for free. They charge you an extra amount, which is called an interest rate, and
- Tenure: How long do you have to pay it back,
- Loan Payments: The amount of money you need to pay regularly, like every week or month, to meet your loan requirements. This payment is determined based on factors such as the initial amount you borrowed, how long you have to repay the loan, and the interest rate.
The majority of people like to borrow money from a bank or a trusted non-bank financial company because they follow government rules and are known as trustworthy.
Types of Loans
Based on the Purpose
1. Personal Loan: When you need money for various purposes like paying off debts, going on a vacation, buying a house or car, handling medical emergencies, or purchasing expensive items, you can apply for a personal loan. To qualify for a personal loan, lenders consider your previous financial dealings with them and your credit history.
2. Home Loan: A home loan is taken when you want to buy your dream home/construct a new home, or renovate or repair an old house. You repay the borrowed money along with interest in monthly installments within a specified time frame. Your house is used as collateral until you fully repay the loan.
3. Vehicle Loan: If you need funds to buy a two-wheeler or four-wheeler vehicle, you can opt for a vehicle loan. You pay back the borrowed amount, along with interest, through monthly installments. The lender may require a down payment, and they hold ownership of the vehicle until the loan is completely paid off.
4. Education Loan: When you require financial support for your education, whether it’s pursuing an undergraduate or postgraduate degree or any other diploma or certification course, an education loan is a suitable choice. Typically, you need proof of admission to obtain this loan. It covers expenses such as tuition fees, books, and living costs while you’re studying. This type of loan can be used for both domestic and international courses.
Based on the Pledged Assets
1. Gold Loan: Many financial institutions and lenders offer cash when you use your physical gold as collateral, whether it’s in the form of jewelry or gold bars/coins. The lender assesses your gold’s value and purity and offers a loan accordingly. To pay back the loan, you make monthly installments to reclaim your gold. And, if you don’t make the repayments on time, the lender has the right to take possession of the gold to cover their losses.
2. Loan Against Assets: Similar to pledging gold, individuals and businesses can use assets like property, insurance policies, FD certificates, mutual funds, shares, bonds, and more as collateral to borrow money. In this case, the lender will offer a loan amount based on the value of these pledged assets. To reclaim your assets, you need to make timely repayments as per the agreed schedule. If you fail to do so, the lender may sell the assets to recover the unpaid money.
Benefits of Loan
Before deciding on a Loan, let’s take a look at its benefits:
- Loan Choices: There are various types of loans available for different needs and situations. You can choose which fits your requirements.
- Manageable Repayments: Loans typically come with fixed EMIs (Equated Monthly Installments), making it easier for borrowers to budget and manage repayments.
- Quick Disbursement: Some lenders offer fast loan processing, and you can get the funds within a few minutes to a few hours.
- Support for Education and Homeownership: Loans like education loans and home loans make it possible for individuals to pursue higher education or own a house, fulfilling long-term dreams.
- Tax Benefits: Some types of loans, like home loans, offer tax benefits to borrowers, reducing their overall financial burden.
- Third-Party Guarantee: In the cases of unavailability of collateral, the option of a third-party guarantee can help individuals access loans.
- Prepayment Option: Some loans allow you to make full or partial prepayments, although penalties may apply with certain lenders and loan types.
Factors Lenders Consider for Loan Approval:
When you’re applying for a loan, it’s like a two-way street – you want the money for a home, a car, or any other financial need, and the lender wants to be sure you’ll pay it back. So, what are the things they look at to decide? Let’s take a look at these simple terms.
- Good Credit Score: You should have a decent credit score, which reflects your past financial responsibility.
- Income & Job History: Lenders like to see a consistent stream of income, so you should have a job or a stable income source before you apply for a loan.
- Age: You should be between 23 and 60 years old when you apply for the loan.
- Bank Relationship: You should have had a good relationship with your bank in the past, which will work in your favor.
- Debt-to-Income Ratio: It's not just about how much you make; it's also about how much you owe. If your debts are too high compared to your income, they might not give you more. They want to make sure you can handle your existing expenses and the new loan.
- Collateral: If you have something valuable to offer as collateral, like a car or property, lenders feel more secure. This can lead to lower interest rates. Unsecured loans usually have higher interest rates because there's no collateral.
- Timely Payments: If you've been good at repaying previous debts on time, it's a positive factor.
Documents Required
For Salaried Applicants:
- Application form with a photo
- Proof of identity and address
- Bank statements (6 months)
- Your most recent salary slip
- Form 16
For Self-Employed Applicants:
- Application form with a photo
- Proof of identity and address
- Bank statements (6 months)
- Proof of your business
- Business Profile
- Income tax returns for both yourself and your business for the last three years
- Profit and loss statements and balance sheets for your business for the last three years
How to Apply for a Loan?
Getting a bank loan is not as complicated as it may seem. But before you jump in, it is important for you to understand your financial situation because you’ll be responsible for repaying the borrowed money later. Let’s take a look at the below steps:
Step 1: Choose the Right Lender
First, you need to do some research and choose a lender that suits your requirements. Ensure that you meet the eligibility criteria.
Step 2: Apply
You have two options: you can either visit the bank in person and talk to their loan manager, or you can directly apply online on their official website.
Step 3: Document Submission
Next, you’ll need to provide all the necessary documents and proofs required by the bank.
Step 4: Application Processing
The bank will review your application and reach out to you to inform you if your loan request has been approved or not.
Tax Benefits on Loans
Loans are a common way to secure funds for various needs like starting a business, buying a home, funding education, or purchasing a car. What’s interesting is that different types of loans can offer tax benefits. For example, Personal Loans, Home Loans, Car Loans, and Education Loans can all have tax advantages under certain conditions.
- Personal Loans, although not taxable, may qualify for deductions if used for specific purposes like business investment, home renovation, or asset acquisition.
- Home Loans, which come with substantial amounts and lengthy repayment periods, offer significant tax benefits to encourage homeownership. If you take a loan to buy a house from any Indian financial institution, you might be eligible for income tax benefits under Section 80EE.
- Car Loans usually don’t provide tax advantages unless the vehicle is used for business purposes and eligible for a tax deduction under Section 80C of the Income Tax Act.
- Education Loans have extended tax breaks under Section 80E of the Income Tax Act to support higher education.
- Gold Loans, however, typically don’t offer tax benefits unless the loan amount is used for home improvements or residential property purchases, where deductions under Sections 80C and 24 may apply.
Happy investing and thank you for reading!
Disclaimer: This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
