Requirement for money may arise at any time. One may need money
for starting a business, purchasing a vehicle, or building a
house. If one has the required amount in his or her hand then
the needs can be met. However if one does not have the requisite
amount, one can opt for a loan.
What is a loan
The term refers to the process of lending of money to someone
on the stipulation that it will be repaid within an agreed time
period. They are extended to meet short term money requirements
while the payback time may vary depending on the amount borrowed,
the agreement reached etc. Loans can be
extended by banks, non banking financial institutions and
The rate of interest is the additional
amount that a borrower has to pay to the lender over the principal
amount. It is a factor that varies with market conditions, state
of the economy, demand for money etc. This rate is often a percentage
of the principal amount.
Not everyone can take a loan as most lenders do a check on
your financial status before approving a loan. If you have
maintained a good credit together and have a regular job, you could
be eligible for a loan with a small down payment of 4 percent (in
case of big loans). If you are married and if your spouse is also
employed, you will be able to secure a loan easily. The amount
provided as loan is referred to as the principal.
Loans taken from institutions come with a processing fee
which has to be paid at the time the loan is released. Loans can
extend anywhere from 1 year to 30 years. It should be understood
that if the repayment period is more, then one may end up paying
more than the principal amount in interest. Thus generally the
period of repayment is also important as longer time means more
payment sometimes upto 3-4 times more than the principal
Types of Loans
Based on the nature of the borrower, following are the
these loans are provided to cover expenditure incurred by an
individual. This loan is often used for meeting expenses for
purchasing vehicles, electronic equipment, education,
building\refurbishing home and for travel.
these refer to the money extended to small business or institutions
for meeting their financial needs. These often have higher rate of
interest and the time for repayment may also be quite less as
compared to personal loans.
are provided to farmers and institutions engaged in agriculture
related activities. These loans are often subsidized by the
government and are provided on easy terms including very low or no
rate of interest, no collateral and longer repayment
money borrowed by governments for financing various schemes like
improving infrastructure etc. Money is borrowed from international
institutions like the World Bank or the International Monetary
Based on the type of rates:
this is a repayment option in which the rate of interest payable
remains fixed til
the end of the term of repayment. This means that the rate of
interest will not be altered even if there is an economic boom
or there is recession and there is demand for money in the market.
This is the best option if one is considering repayment in the
long term. In order to derive the full benefit of this, one
will have to go in for loans when the interest rates are low
or wait for such a time. There are some variants of this in
the market through which, one can repay at a fixed rate for
upto 7 years and then pay the reminder at floating rates.
Floating rates: if one wants to repay the
loan in a short period of time, it is advisable to go in for the
floating rate or adjustable rate Loans. The rates charged
under this option are decided by market forces, state of the
economy, strength of the currency etc. The benefit of this option is
that initially, lower interest rates are charged when compared to
fixed rate loans. This means that the entry load is quite low and
this may be attractive for people who want to borrow for short term.
However, with the passage of time, these initial low rates are
replaced by higher or lower rates depending on the market. In the
long run, when one counts inflation, it becomes clear that the
interest rates will go up in the future. Some lenders put a ceiling
on the amount of variations both up and down so that the final
figure remains in reasonable territory.
this is a combination of the two previously mentioned options. The
lender gives the borrower an option for repaying the loan for a
specified period of time at variable rates and then at a fixed
Sometimes the lender may ask the borrower to provide
collateral as a measure for security. Collateral is often a property
owned by the borrower. In case one does not have sound financial
background, this becomes all the more important and the lender may
not oblige unless collateral is provided.
the market, at any given time, there will be thousands of schemes
and rates and it becomes quite difficult to make a decision.
This quagmire however should not worry the inquiring and investigative
customer who can analyze the options and decide on what’s
best for him. However for those who are not so much gifted and
do not have the time needed, a broker can do this service for
you. He will guide you through the diverse portfolio of schemes
and help you in making a sound financial decision by understanding
your needs and short and long term plans. Brokers will however
charge you for their services. The rates charged may be independent
of the final loan amount or may be a percent of the same.
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