Loans

Introduction

When we were in school, we often faced a situation where our pen ink ran out or we forgot our pens at home. What do we do at that time? We simply ask for a Pen from our friend, which is often termed as Borrowing. However, this “borrowing” is interest-free. You don’t necessarily give a treat, or pay them in cash while returning the Pen. You just greet them with a warm thank you!

The loan is quite similar. When we need a large amount of money for various purposes, we tend to turn our thoughts towards applying for a loan. It is often said that a financially successful person knows when to apply for a loan- when it is a good solution to the problem they are facing.  However, it can be said that Loans can trouble you when you cannot necessarily afford to pay them back, along with the Interest amount. 

It is considered that Bank Loans are safe as compared to other ways of securing a loan amount. Let us understand what Bank Loans are! 

What are Bank Loans?

Bank Loans, like any other Loan, are financial assistance that the Bank provides to its customer. Banks lend you money, which you are expected to repay along with a fixed interest rate. One of the primary functions of the Banks is Advancing Loans. 

The deposits that the bank receives from its customers are not kept idle in the Bank. They usually keep a certain cash amount reserved and lend out the remaining amount, in the form of Loans. The main source of income for the Bank is the interest on these loans. 

Loan and its Agreement

Whenever a Bank provides a customer with a Loan, banks make them sign the Loan Agreement. This agreement tells everything about the customers’ loan preferences along with their signatures, making the exchange official and legal. 

The agreement also includes the following important terms:

• Collateral

Collateral can be said as a backup for the Bank. Whenever a borrower fails to repay their loan amount, along with the Interest amount, the Bank tends to cease the Collateral provided by the borrower. It is said to be a security for the loan one is applying for.

• Interest rate

It is the amount that the lender charges along with the Principal Amount. An interest amount is usually charged from the borrowers for the use of any kind of assets- vehicles, property, cash, etc. 

• Principal Amount

It is the amount that one borrows from the Bank (or, any other institution).

• Repayment Chart

It is the section of the agreement that deals with the repayment periods of the Bank Loan. The repayment is done over time, with a certain portion of the Principal Amount and Interest rate. 

With these, there are a few additional terms which you must know about. These are:

• Borrowing Rate

The rate at which the Banks accept deposits from the borrowers is known as the Borrowing rate. 

• Lending Rate

The rate at which the investors receive the reserves of the Bank is known as the Lending rate.

• Spread

The difference between these two rates is known as Spread. Spread is the profit earned by the Banks. 

Categories of Loan

The different types of Bank Loans available in India are classified into two categories- 

1. Secured Loans– The loans that do require Collateral are known as Secured Loans. Hence, if one doesn’t repay the amount to the bank, the bank has some security to get their money back. This loan tends to have a lower interest rate.

   Secured loans include: 

   • Home Loans
   • Gold Loans
   • Loans against mutual funds, shares, and policies
   • Loans against fixed deposits of the borrowers
2. Unsecured Loans– The loans that do not require any Collateral are known as Unsecured Loans. These loans are approved by the Banks based on the Borrowers’ history and relationship with the Bank, Credit score, etc. They have a relatively higher rate of interest.

   Unsecured Loans include:

   • Education Loans
   • Vehicle Loans
   • Personal Loans
   • Business Loans (Short term)
   • Personal Loan (Flexi)
   • Loans on Credit Cards

Conclusion

Bank Loans/Loans play an important role in managing the expenses of an individual, in times of need. Loans are not only provided to an individual, but also to various institutions, organizations, the government sector, and business corporations. These loans help in increasing the Money Supply of both the Lender and the Borrowers. Loans are classified into two categories- Secured Loans and Unsecured Loans. The main difference between these two categories is the Collateral requirement. Under these two categories, different types of loans are included- which are of utmost help to the Borrowers.