A loan is largely an act of giving cash, assets or other material goods to any other party. While lending loan several things are considered such as the principle amount together with interest and other finance charges. A loan can be for short-term or long-term. It depends upon the needs of the business or an individual. Loan can be taken by firms, organisations and many medium and large corporations to finance the working capital requirements of the business, to ensure there is no capital rationing and business do not lag behind in the fast-growing and competitive environment. Besides the corporate organisations, loans are also taken on an individual level to achieve one’s goals, financial requirements, financial and future planning and to enhance the quality of life. It can be taken to improve one’s financial conditions, to buy a new house or a vehicle, for education purposes etc.
At the first instance, Customer visits bank to apply for Loan.The Customer is required to fill up the application form for loan.
He / She then provides the bank with the basic documents like(ID proofs, varies according to country) Visa status, Address Proof, Form 16 (in case of salaried individual), last 3 Years ITR Returns for any kind of assesses, Bank Statements and other miscellaneous documents(as per bank’s requirement) for his/her identity as an applicant.He / She then furnishes the details of the securities for loans.
Before any loan is sanctioned, Banks conduct Pre-Release Inspection of the party applying for the loan, their credibility (Capacity to pay loan) and various procedure compliance like obtaining the services of Actuaries for the valuation of Securities to the loan.
Banks keep some percentage of margin on Security values to avoid the problem of liquidity.
For Example: If a Loan of $ 1,00,000 is to be sanctioned, then Bank may keep Securities of $ 1,25,000 i.e. margin of 25% to avoid liquidity crisis.
After the Approval of all the authorities concerned to it, Banks finally sanction the Loans.
In Case of Home Loan, documents like Leave and License Agreement need to be obtained.
In Case of Business Loan.
Sole Proprietor —> Sole Proprietor Declaration.
Partnership Firm —> Partnership Deed.
Company —> Memorandum of Association (MOA) and Articles of Association (AOA).
HUF—> HUF Agreement.
Types of Loans
1) Personal Loan:
• Personal Loan is loan taken for the personal benefit of an Individual and don’t have any designated purpose.
• Interest rate for this type of loan is usually less than other types.
• Usually people who have various kind of debts prefer to take this loan.
2) Mortgages :
• Mortgages are loans distributed by banks to allow consumers to buy homes they can’t pay for upfront. A mortgage is tied to your own home, which means you chance foreclosures in case you fall behind on payments. Mortgages have among the lowest interest prices of all loans.
3) Education loans :
Education Loan may be taken by the Individuals for the purpose of the education of the Spouse, Children’s or self.
The Bank may ask for the University or Board’s Fee’s Structure and the applicant’s repayment schedule for discharging the Loan.
• The rate of interest are usually higher i.e. 12-13 %
4) Business loans :
Business Loan is taken by the organisations, firms or large corporations for the purpose of functioning of business and for the continuation of the operations which occurs due to shortage of funds.
• Business Corporations have to submit the repayment Schedule for repayment.
• For Example, they can prepare Long-Range Plans of 1-5 year’s Financials. (Income Statement.)
• The rate of interest is usually 8 %.
5) Auto loans :
• Like mortgages, vehicle loans are tied to your own property.
• They can help you afford a vehicle, but you risk losing car if you miss payments.
• It is safer to take this type of loans from banks because the rate of interest is lower, even the car dealer directly gives you the loan but the rate of interest is higher.
6) Consolidated Loans:
• A consolidated mortgage is supposed to simplify your finances.
• Simply put, a consolidate loan pays off all or several of your outstanding debts, particularly credit card debt.
• It means fewer monthly payments and lower interest rates. Consolidated loans are typically in the form of second
mortgages or personal loans.
5 things to keep in mind while getting your loan approved:
1) Banks always prefer people with clean financial habits. A credit score tells a lot about your financial health. Whether you pay your EMIs on time or default can be easily checked through your credit report, which is maintained by different bureaus.
2) There are some occupations that banks prefer. For instance, in lots of authorities banks, government and psu employees are most favored as they have got a stable job. After government employees, banks prefer people working with blue-chip companies and doctors. Further down the line come chartered accountants, engineers and lawyers. People working in private companies and self-employed get the lowest scores. Occupation is one of the important factors taken into consideration while appraising a home loan. It is important because repayment capacity depends on the income of the person.
3) Age is any other criterion that banks examine before giving a loan.To provide you an idea, humans within the age group of 30-50 years are maximum favored as they will be considered more financially strong. They also have a decent number of working years left to repay their loans. On the other hand, people above 60 fare the worst in the internal scoring model of banks.
4) You must have noticed that banks ask you for how many years have you been working with your current company. This is because the longer you serve the more points you earn with the bank. For example, people working for more than 15 years are preferred over those with an experience of up to 10 years. Banks decide upon people who’ve been serving in a enterprise for as a minimum three years. The shorter the repayment period, the more your bank likes you. For example, several banks give maximum score to people who opt for a repayment period of up to five years. It falls to half if the repayment period is between 10 and 15 years. And it is at the lowest end for those opt for a payment period of 15-20 years. So, the next time, try to shorten your loan duration if approval becomes difficult. The older your relationship with the bank, the higher are your chances of getting the loan approved. Banks value their old customers due to familiarity with the financial past. A person who has been with a financial institution for extra than 10 years is genuinely desired over the one and not using a previous dating with the bank.