A Bank is a primary unit of the Indian banking system. It is an institution that performs the functions of accepting deposits, granting bank loans, and making investments to earn profits. The rate of interest at which the commercial banks accept deposits is known as the” borrowing rate” and the rate at which banks lend out their reserves to investors is called the “lending rate”.
Commercial bank has two primary functions:
- Accepting deposits
- Advancing of loan
Further, we would mainly discuss the function of Advancing of Loan:-
Advancing Of The Loan And Its Different types
A loan can be defined as the money which is borrowed for a limited period with the guarantee of return. The deposits received by the bank are not allowed to remain idle. So after keeping some cash reserves, the balance is given to the needy borrowers and interest is charged for them which is the main source of income for these banks. Different types of bank loans are:
1. Unsecured Bank Loans
They are those that don’t need collateral for giving loans. The Bank keeps into account many factors to discern whether loans must be given or not like an estimation of the previous connection with the borrower, score of credit etc. As there is no way of regaining the amount of loan if borrowers bankruptcies, the rate of interest is higher for these loans. The various types of unsecured loans are:-
● Personal Loans
One can prefer to go for personal loans for their requirements like education, health, weddings etc. We can see an increase in several personal loans for different purposes in recent times. Many reasons exist for the increase in personal loans like low rates of interest, liquidity, etc. The documents required are:
- Know Your Customer documents like Aadhar card, driving license
- One’s slips of salary of last Two months and proof of income for employed persons,
- Copy of Statement of income tax
- Statement of savings account.
● Small Business Loans
One can benefit from a business loan for financing requirements of capital, broadening premises, and employing staff. The importance of Small Business loans are:
- The amount of loan ratified will be attributed to one’s account within 24 hours and fewer documents are needed to start the operation without holdup.
- A Tenure of repayment should be chosen which does not exceed 60 months. Repayment time should be accompanied by the flow of cash.
● Education Loan
Dream of studying abroad and from prestigious institutions increase the demand for such loans. It can be utilized full-time or part-time in any field of their study. A special feature of this type of loan is the suspension period where students cannot pay EMI till 12 months of their course completion.
● Vehicle Loan
This loan is purchased for buying new vehicles or used one, whichever form it may be like a two or four-wheeler vehicle. The score of credit, ratio of debt to income, tenor of loan etc play an important role.
2. Secured Bank Loans
It requires collateral as a guarantee against borrowing. The collateral secures the lender’s right if the borrower could not return the borrowings lent to him. As compared to Unsecured loans, It has a low-interest rate. Varied types of secured loans:
● Home Loans
It offers you the money needed to buy and build a dream house. Pradhan Mantri Awas Yojana by PM Narendra Modi gave a major catalyst to home loans in India. You may apply for the loan in order to buy a new home or reselling of home, extension and furnishing of the home. The importance of this loan is:
- The sanctioned loan is disbursed to the account within 72 hours.
- There is also an option to increase your repayment period in order to assure that the loans don’t give you stress and lower your cash.
● Property Loan
Loans against property enable you to mortgage the property to use the funds for financing your requirements of business or personal ones. Some of its important points are:
- The amount of loan expended ranges from 60-70 per cent of the market price of commercial property.
- To receive the best price on your property that satisfies your need, you can talk to the lender’s representative.
● Loan Against securities
A Securities Loan enables you to finance your investments by promising to fund borrowing for personal or business requirements. Options of promising investments are shares, mutual funds etc. Its importance is:
- Promise several authorized securities such as shares, mutual funds, bonds etc for obtaining a loan of 70 percent of the units promised.
- Obtaining the benefits of options of multiple repayments and no charges of prepayment.
● Gold Loans
For many years, gold has been one of the most preferred asset classes. A gold loan requires one to promise gold jewellery or assets as collateral. A certain percent of the gold’s virtue promised is the loan amount consent. A gold loan is short-term as compared to home or property loans.
● Loans Against Mutual Funds And Shares
Mutual funds can also be promised as loan collateral. One can promise capital funds to financial institutions for giving loans. For this, one needs to write to the financier who would write to a registrar of mutual funds, and a lien is put on a particular number of units to be promised.
● Fixed Deposit Loan
It not only gives definite returns but caters to your immediate needs. It ranges between 70 to 90 percent of the value of FD and also varies among lenders.
Eligibility Criteria For Bank Loans
The criteria of eligibility depend on the type of loan. Some of the criteria are:
- A reasonable score of credit
- The continuous flow of income
- Age should be between 23 -60 years
- Some collateral like FDs, non-movable property, investments, etc
- Good connection with bank
- The Debt Repayment history should be a timely one.
Characteristics And Benefits Of Loan
- Based on several factors, many types of loan can be classified. One can choose the kind of loan that one wishes to take depending on the prerequisite and eligibility.
- Many persons who lend loans give instant loans that take less time to get disbursed.
- There is much flexibility on where to spend the money received from bank loan. Bank doesn’t provide guidelines on how to spend the money
- Mostly, Bank loans have a cheap rate of interest. The rate of interest one pay is less and cheaper than with credit cards, venture capital etc.
- There is no need to give capital while taking a loan from a bank. However, venture capitalists and investors force you to pay equity.
For Salaried Applicants:
- Application Form along with Photograph
- Proof of Identity and Address
- Bank Account Statement of last 6 months
- Recent Salary Slip
- Form 16
For Self Employed Applicants
- Application Form along with a Photograph
- Proof of Identity and Address
- Bank Account Statement of last 6months
- Evidence of Business
- Returns of Income Tax
- Statements of profit/loss of the last 3 years
- Things To Keep in Mind Before Taking a Loan
Taking out bank loans has shown to be really beneficial to the people. In India, the procedure of obtaining a loan has grown much simpler and more widespread. Because of the horrible circumstances, taking out loans has been more popular during the Covid-19 rise. Loans, on the other hand, can aid with personal and other emergencies.
Many people have begun to experience financial difficulties, and it has become difficult for them to manage their expenses, which have increased dramatically as a result of increased spending on health and hospitals as a result of unemployment and pay cuts. As a result, bank loans became a tool for people in society to manage unexpected expenses.
While taking out bank loans is generally a good idea, there are a few things that everyone should think about before doing so because it is a huge decision with a lot of paperwork. There have also been reports of internet loan fraud and other issues.
There are a few things to keep in mind while taking out bank loans over the internet using net banking.
- Never trust unauthorized sources; always check official websites. As the number of transactions on the internet grows, so is the number of frauds.
- While it is important to keep an eye on interest rates, discussing several bank loans should be avoided.
- To ensure a hassle-free process, bear in mind the documents requested by the official, as well as the payment method and processing fees.
When taking out any type of loan, it’s important to keep your needs in mind. The evaluation of your needs and the amount that you will require is of the utmost importance. Interest rates and the length of time you’ll need to repay the loan should also be taken into account.
It’s a good idea to go over your budget and expenses. As a result, make sure you verify your repayment plan on a regular basis and factor in all additional expenditures to avoid any problems in the future.
Having Understood the different types of bank loans in India, We can see their usage in different fields like in the field of Education, Agriculture, Business etc. But many banks have not ratified secured and unsecured loans for several purposes except if a loan is borrowed for legal purposes. Before applying for an application, We should keep in mind both the Pros and Cons of secured and unsecured bank loans. Hence, Make the right choice for applying for any bank loan.