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What is loan?
Hello! Ever wanted to buy that swanky new car or the picture-perfect home but felt just a little too short on cash? Well, that’s what loans help you with—really handy financial tools that can kindle hope in bridging the distance between dreams and a bank account. Don’t worry, this isn’t any esoteric financial jargon; we’re really here to break it down into simple terms.
So, what is loan? Think about this: If you were to be given money by a bank or any other financial institution on an agreement with them that you would pay it back with interest over some fixed period, this would be pretty similar to renting money. As opposed to returning the exact amount, you give a little extra on top of it for interest. Hence you now understand what is loan . Let’s elaborate a little bit.
What are the types of Interest: There are mainly two types – fixed and variable. Fixed interest rates are fixed in value throughout the loan, while the variable interest rate changes in the light of market conditions. Now you understand what are the types of interest .
Secured vs. Unsecured Loans: The former are asked for guaranteed collateral in the form of security for availing the loan, such as a car or your house. Obviously, if for any reason you are unable to repay, the lender has all the rights to seize your personal collateral. Unsecured loans do not require any collateral but quite obviously charge a higher rate of interest.
Repayment Options: All loans will have alternative repayment options available. There are a few alternatives you have for repayment like fixed amount that is spread monthly, scheduled throughout the whole loan period or a balloon payment whereby a significant amount is paid at the end of the loan. Choose the one that best suits your budget or financial situation.
Impact on Credit Score: Your credit score could actually benefit from taking out a loan and paying your installments on time. On the other hand, failed payment will harm your credit score and can further complicate your borrowing chances in the future
What are the Benefits of Taking a Loan ?
Sounds helpful, right? But before jumping in, let’s talk about the benefits of taking a loan.
Fulfills your dreams: That dream house or car? Loans make them a possibility where you can enjoy them sooner than later.
The building of assets: Owning a home is an excellent way of building wealth overtime.
Spread it out: Big-ticket items are hard on the wallet. Loans give you the chance to spread out the cost in manageable monthly payments.
Tax benefits: There could be tax advantages to loans. For instance, interest paid on your home loans is additionally deductible from taxable income. Consult a tax advisor to see if this applies to your situation.
Improve your credit rating: In case you avail of a loan and make the repayments on time, that would really help improve your chances of getting loans in the future at cheaper rates.
Hence now you understand what are the benefits of taking a loan.
What is the Eligibility for a Loan?
Okay, so… interested? So here’s what you need to know about eligibility for a loan:
Income: Lenders generally check that you have a stable source of income that guarantees your repayment of the loan.
Credit History: A good credit score proves to prospective lenders that you’re a credible borrower who will get a loan on very favorable terms.
Debt-to-Income Ratio: This is the ratio of your monthly debt obligation against your income. The lower it is, the more efficient you are in managing your finances, hence increasing the chances of securing a loan. This is the most important eligibility for a loan.
Employment Stability: For salary earners, the lender may put into consideration an employee’s employment history and stability in his or her current job.
Property Valuation (in case of secured loan): In the case of some secured loan, like a house loan, it becomes very important to understand the value already obtained for one’s property. Secured loans are given against property, and in case one fails to pay, the property is seized by the lender. So they have to make sure that the value of the property will be enough to pay off the loan in a situation like this.This is where property valuation comes in.
A professional appraiser will assess your property and come up with its fair market value. The value reflects the price that a willing buyer would pay to a willing seller in an arm’s length transaction. The lender uses this appraised value in deciding a maximum loan amount they are comfortable lending to you. One among the important eligibility for a loan to focus.
The higher the valuation, the larger is the loan amount that can be sanctioned. It provides assurance to the lender that his money is safe, and at the same time, you get more money for your needs.
Now you know the best criteria for the eligibility for a loan
What Documents Are Required to Apply for a Loan?
| Eligibility Criteria | Requirement |
|---|---|
| Nationality | Indian |
| Age | 18 years |
| Type of employments | Salaried or Self-employed | Business Owner | Independent Worker | Student | Retired | Homemaker |
| Income | Differs from one bank to the other |
| Credit Score | Good credit score (700 and above) |
Proof of Identity |
|
Address proof |
|
Income proof (For salaried) |
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Income proof (For self-employed) |
|
Now, let us conclude the discussion! If strategically used, loans can turn out to be very effective in reaching your financial goals. Therefore, knowledge of types, benefits, and eligibility criteria for any loan will keep you in the know about what is happening. Always remember to research lenders, compare rates of interest, and borrow responsibly. Happy borrowing!
