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Loans review



There are different types of loans available in the market for financing different types of assets. These include car loans, home loans, gold loans, personal loans, and so on. Even incorporated and non-incorporated businesses take loans for their financial requirements.

Loans at personal levels are obtained from:

  • Friends and relatives;

  • Credit Card agencies

  • Banks and credit unions; and

  • Financing arms of businesses selling consumer products, vehicles, or homes.
  • The quantum of loans from friends and relatives will invariably be small. Normally, no interest is payable on such loans.

    Generally people borrow on their credit cards. Borrowing on credit card is easy with once in a year paper work. Credit card agencies bend backwards to accommodate a customer. It is also very easy to lose track of the borrowings, as the repayment does not loom ominously on head at the end of every month. However, interests rates applicable are truly exorbitant.

    Banks offer different types of loans to individuals. For very small quantum of loans, some banks do not take any security. Such loans are granted merely on strength of the monthly income, and employment record of the borrower. However, the bank asks for a guarantor for such loans.

    For giving larger loans, banks ask for collaterals, which becomes a security for the bank, in case the borrower defaults. The value of the collaterals acceptable to bank is generally equal to if not more than the quantum of loan being availed by the borrower. A borrower may require a bulk sum, but have varied assets. Different types of assets are valued differently and are eligible for different types of loans. Therefore, the interest on loans given on stocks will be higher than interest on loans granted on government bonds. Similarly, a first time home loan will carry lesser interest than the home loan availed for purchasing second home. Tenures of loans also differ. Home equities can be withdrawn as loans, however, the repayment will have to be completed in much shorter duration when compared to home loans.

    Bankers differ with one another in their loan schemes, and interest. The differences in interest may only be marginal, and negligible. This is because the central bank governs the basic interest rates on which the banker adds average-borrowing costs incurred by it and further increases this by proportionate administration charges.

    Loans backed by more concrete collaterals such as real estate properties carry lower interests. They are also lent for longer duration. The logic behind this is that such assets do not lose value over time. In fact, they gain in value over time. Therefore, the banker can rest assured that the money is going nowhere, even if the borrower defaults ever so often.

    Interest on loans given by the bankers is normally accounted on monthly rests. That is the banker calculates the interest at the end of the month and debits the account. Most banks calculate interests on borrowed amounts on daily balances. Effectively, the interest is compounded on monthly basis.

    As far as home loans are concerned, bankers calculate interests in two different methods. One is the fixed interest rate method, and the other is the adjustable rate method. In fixed interest rate method, there is no variation in either the quantum of installment paid or the tenure, throughout the loan period. Unlike it, in adjustable rate mortgage home loans, the interest rates move up or down based on the index agreed between by the borrower and the banker. Consequently, the home loan installment may increase or alternately, the tenure of the loan may stand increased. Bankers offer home loans on equated installments, making it easier for borrowers to repay the amount. Part of the installment is interest and the rest is a tidy sum of principal. Increase in interest component results in decrease in principal component, in the adjustable rate mortgage loans.

    Interest charged by the banker must be reworked to arrive at the real interest costs, by taking into consideration the charges collected by bankers for granting such loans. However, such loans are still cheaper than what other financial lenders offer.

    Borrowing from financing arm ranks almost at par with the borrowings from bank. Interest rates charged by these organizations are higher than what is conveyed, because the interest is calculated for the entire period before hand, and added to the principal being borrowed. This bloated amount is then divided over the entire tenure of the loan for repayment in equated monthly installments. Effectively, some compounding is done. At times, these lenders collect a few installments before disbursing the loan. This is a clever way of charging higher interest because, the borrower would be receiving lesser loan than he bargains for but the interest would be charged on the full loan amount. These loans are given for shorter period, as the underlying asset is the very asset that is being financed. The life of vehicles is always estimated less than an asset such as home.

    In businesses, promoters, directors and their relatives replace the friends and relatives category. These loans are essentially temporary loans and do not entail any interest payments. The option of credit cards is also out. Bankers lend on security of the business assets including investments, inventory, debtors, vehicles, buildings, furniture, and machinery. Based on the type of security, the interest rates and tenure also vary. Businesses also borrow from general public by offering a fixed rate of interest, which is generally slightly higher than what is offered on government bonds.

    The government as a policy encourages some businesses. In such cases, finance is granted by industrial development agencies for such businesses. Interest on such finance is nominal, and repayment tenure long.

    Shareholders funds, whether as share premium or stocks, do not qualify as borrowings. They are the investments of the business owners.