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What is a Loan? Types, Advantages & How To Apply For A Loan?

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Lending or loan means lending money from a person, friend, or institution to another and assuring them to return it in the future with the principal as well as interest. A loan has three components – the principal or amount borrowed, the interest rate, and the tenure or period for which the loan is taken. It is one of the primary financial products of any bank or NBFC (non-banking financial company). The principal is a loan amount, and there is an interest charge on obtaining the loan. Considering that the lenders take the risk of offering you a loan facility and fearing that you may not be in a position to repay them, they will have to save themselves from losses by recovering the amount as interest. That is why they decide to take interest in you.

# What is a Loan?

A loan is money that one or more individuals or companies borrow from banks or other financial institutions to financially manage planned or unplanned events. When doing so, the borrower makes a loan, which he has to pay back with interest and within a certain time.

# Category of Loans

Loans can be broadly categorized as secured or unsecured.

1. Secured Loan:- A secured loan is a loan given by a financial institution in which an asset is used as collateral or security for the loan. Like you can use your house, gold, etc., which can avail the loan amount corresponding to the value of the asset. In the case of secured loans, the loan disbursed by the bank or financial institution will remain at work owned by the property, Until the loan is repaid, Till then the loan will be disbursed to the ownership deed of the asset.

Some Examples of Secured Loans: Vehicle loans, Mortgage loans, Car loans, Life insurance loans, etc.

2. Unsecured Loan:- Unsecured loan, as the name suggests, is a loan that is not secured by collateral such as land, gold, etc. These loans are comparatively risky to a lender and are therefore associated with a higher interest rate. When a lender issues an unsecured loan, it does so after evaluating your financial situation and assessing whether you are able to repay your loan. Some Examples of unsecured Loans: Credit cards loan, Personal loans, and Education loans.

# Types of Loans 

  1. Personal Loan: Personal loans are provided to meet the personal needs of the bank borrower. You can use the money from this type of loan in any way. You can pay off your previous debts, buy some expensive items for yourself and plan a trip with your family, etc. The interest rates of this type of loan are higher than other types of loans. Rates offered by some of the top banks in India with their personal loans start at 10.40%.

  2. Home Loan: Everyone dreams of buying their home and own it. However, a lot of money is required to buy a house and it is not possible for everyone to pay that much at once. Banks now offer home loans that can help you buy a property. These loans generally go for a longer tenure (20 years to 30 years). Rates offered by some of the top banks in India with their home loans start at 8.30%.

  3. Education Loan: Banks also provide education loans to those who need them. These loans provide better support to the students in terms of study opportunities that are financially weak. Students wishing to pursue higher education can avail themselves of education loans from any bank in India. Once they secure the job, they will have to repay the money from their payment. Rates offered by some of the top banks in India with their education loans start at 7.30%.

  4. Gold Loan: A gold loan can be used to meet emergency or planned financial needs, such as business expansion, education, medical emergencies, agricultural expenses, and more. A loan against gold is a secured loan where gold is held as security or collateral in exchange for a loan amount that matches the market price per gram of gold on the day the gold is pledged. Rates offered by some of the top banks in India with their gold loans start at 9.50%.

  5. Agricultural Loan: Agricultural loans are loans that are provided to farmers to meet their day-to-day or general agricultural needs. These loans can be short-term or long-term. They can be used to raise working capital or purchase agricultural equipment for crop cultivation.  

  6. Cash Credit: Cash credit is a bank process to pay the customer in advance. This process allows the customer to borrow a certain amount from the bank. The customer offers the bank some securities in exchange for cash credit. The customer can renew this process each year.

  7. Vehicle Loan: Vehicle loans help you fulfill the dream of owning a car or bike. Almost all banks offer this type of loan. This secured loan means that if the borrower does not pay the installments on time, the bank has the right to withdraw loan and take the vehicle back.

# Advantages of Loans

  • They can be easily procured.

  • They can be used for short-term as well as medium-term financing.

  • Interest paid on a bank loan is tax-deductible expenses.

  • Bank loans have the cheapest interest rates.

  • A bank loan allows one to make payments as per convenience as long as the installments are regular and timely.

# Why Does a Person Take a Loan?

  • You can apply for a loan in case of a financial emergency.

  • When you want financial support for your life goals, such as to meet needs like home, car, or education, etc.

  • If you are in an unexpected situation where you have debts to clarify, such as social events, hospitalization, and so on; You can apply for a loan to make sure things go on smoothly.

# 4 Important Things to Know Before Applying for a Loan

Taking a loan is a big financial decision that requires you to make an informed choice. here are some:

1. Credit score:- A credit score or CIBIL score is a representation of your credit, based on your credit repayment history. The CIBIL score ranges from 300–900 and a score above 750 is considered ideal. You can maintain a good credit score by paying your dues on time.

2. Interest Rate: Check the loan interest rate before actually applying for one. Loans that typically require collateral have a lower interest rate than loans that do not have a required interest rate are usually higher.

3. Processing fees and other fees:- When you apply for a loan and if you miss the payment deadline for your loan, you will have to pay the processing and penalty fees respectively. These fees and charges depend on the loan amount and the bank.

4. Consider your needs to arrive at the right loan amount:- Make a list of all your requirements and then prioritize where you need to finance the loan. Some common purposes of taking a loan are buying a vehicle, financing a wedding, medical emergency address, or planning a vacation. Depending on the prices and expenses associated with your needs, you can decide the amount and easily think how much money you need to borrow.

# How To Apply For A Loan?

You must keep these things in mind while applying for a loan.

  • Analyze your financial situation.

  • Check your requirement for a loan.

  • You can apply for a loan by Bank or Online.

Applying for a bank loan is as simple as one might think. But before you apply for one, you need to be fully aware of your financial situation, and you also need to remember that you will have to pay the loan later. With all the paperwork and various eligibility criteria in it, you should first understand your requirement and needs thoroughly. If you feel that this is an ideal way for you, you can either go to the bank and talk to the loan manager to get a loan and you can also apply for a loan online.


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