Loans are one of the most important financial assets that allow you or your business to borrow money from lenders. You can use it for various purposes like purchasing a home, funding education, or supporting business operations.
Loan meaning
A loan is a sum of money that one party lends to another, with an expectation of repayment and interest within a fixed period of time. With the help of monthly instalments, you can effectively manage your expenses and obligations.
What is the loan process?
- Application: You apply by providing your personal information and the amount you need.
- Document submission: Submit documents like ID, proof of income, and financial statements.
- Credit check: The lender evaluates your credit score.
- Approval: If approved, the lender offers you a Loan agreement outlining terms like the amount, interest rate, and repayment schedule.
- Acceptance: You review and accept the Loan offer.
- Disbursement: The lender releases the Loan amount to you.
Uses of loans
- To purchase a home
- To cover your educational expenses
- To expand your business
- For emergency purposes like medical needs
- To buy a vehicle
Factors affecting loan eligibility
- Credit score
- Income level/salary
- Existing Loans/debts
- Employment status
- Age
- Relationship with lender
How to improve your loan eligibility?
1. Check credit score:
A higher credit score increases your chances of Loan eligibility. If your score is low, then try to correct it.
2. Stable employment:
Lenders prefer borrowers with a consistent job history, as it proves financial stability and a reliable income source.
3. Timely payments:
Making timely payments is important for maintaining a good credit score. It shows your financial responsibility and reliability to lenders.
4. Income proof:
Providing clear proof of income is vital when applying for a Loan. Lenders typically require documentation such as pay stubs, tax returns, or bank statements to verify your earnings.
Components of a loan
- Principal: The initial sum of money borrowed that needs to be repaid.
- Interest: The cost of borrowing, expressed as a percentage of the principal determines how much extra will be paid over time.
- Loan term: The duration over which the Loan must be repaid, typically from months to years.
- Fees: Additional costs such as origination fees, processing fees, or closing costs that may apply to the Loan.
- Collateral requirements: Collateral requirements, such as property papers, vehicles, etc., can be used to secure the loan.
Types of loans
1. Secured Loan
Secured Loans provide security to the lender, reducing the overall risk. As a result, it comes with low interest rates and large Loan amounts.
2. Unsecured Loan
These Loans do not need any collateral. Due to the higher risk involved for lenders, Unsecured Loans usually come with higher interest rates and stricter eligibility criteria.
3. Education Loan
You can use an Education Loan to finance higher education expenses, including tuition, books, and living costs.
4. Personal Loan
Personal Loan can be used for various purposes, such as debt consolidation, home improvements, or medical expenses. They have fixed interest rates and repayment terms.
5. Home Loan
A Home Loan is money borrowed to purchase a property, repaid with interest over time, and secured by the property.
6. Gold Loan
A Gold Loan is a Secured Loan where gold is pledged as collateral, providing immediate funds with interest repayment.
7. Vehicle Loan
A Vehicle Loan helps you purchase a car or bike. It is secured by the vehicle itself and repaid with interest.
8. Loan Against Assets
A Loan Against Assets allows borrowing money by pledging valuable assets, like property or securities, as collateral for repayment.
Also Read: Instant Personal Loan without documents: Eligibility, benefits & steps to apply
Conclusion
Lenders offer loans to support you financially in tough times and help you make informed decisions. Depending on your financial goals and needs, you can decide on the type of Loan with complete specifications like interest rates, repayment terms, etc.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
