RE-2022-346721- Turnitin Plagiarism Report

ABSTRACT;
This paper aims to study about the kinds of loans in banking sector. There are
various kinds loans where the borrower generally need not mortgage or pledge
any of his parcels. loans are occasionally questioned as the there& no security for
banks as pledge to repay the loan. It takes times for banks to recover the pretences from the
separate borrowers. The paper studies the kinds, eligibility for operation for loans which the
borrowers advance from banks for colourful purpose.

Definitions;
A loan is an agreement between a lender and a borrower where the lender provides a specific amount
of money or assets to the borrower, with the understanding that the borrower will repay the loan,
usually with interest and/or fees, within a predetermined timeframe.

Types of loan;

Secured Loans

These loans require the borrower to pledge collateral for the money being borrowed. In case
the borrower is unable to repay the loan, the bank reserves the right to utilise the pledged
collateral to recover the pending payment. The interest rate for such loans is much lower as
compared to unsecured loans.

Unsecured Loans

Unsecured loans are those that do not require any collateral for loan disbursement. The bank
analyses the past relationship with the borrower, the credit score, and other factors to
determine whether the loan should be given or not. The interest rate for such loans can be
higher as there is no way to recover the loan amount if the borrower defaults.

Based on the Purpose

Education Loan
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Education loans are financing instruments that aid the borrower pursue education. The
course can either be an undergraduate degree, a postgraduate degree, or any other
diploma/certification course from a reputed institution/university. You must have the
admission pass provided by the institution to get the financing. The financing is available
both for domestic and international courses.

Personal Loan

Whenever there is a liquidity issue, you can go for a personal loan. The purpose of taking a
personal loan can be anything from repaying an old debt, going on vacation, funding for the
downpayment of a house/car, and medical emergency to purchasing big-ticket furniture or
gadgets. Personal loans are offered based on the applicant’s past relationship with the lender
and credit score.

Vehicle Loan

Vehicle loans finance the purchase of two-wheeler and four-wheeler vehicles. Further, the
four-wheeled vehicle can be a new one or a used one. Based on the on-road price of the
vehicle, the loan amount will be determined by the lender. You may have to get ready with a
downpayment to get the vehicle as the loan rarely provides 100% financing. The vehicle will
be owned by the lender until full repayment is made.

Home Loan

Home loans are dedicated to receiving funds in order to purchase a house/flat, construct a
house, renovate/repair an existing house, or purchase a plot for the construction of a
house/flats. In this case, the property will be held by the lender and the ownership will be
transferred to the rightful owner upon completion of repayments.

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Based on the Pledged Assets

Gold Loan

1
Banking Regulation Act, 1949.
2
Securities and Exchange Board of India (SEBI) Act, 1992.
Many financiers and lenders offer cash when the borrower pledges physical gold, may it be
jewellery or gold bars/coins. The lender weighs the gold and calculates the amount offered
based on several checks of purity and other things. The money can be utilised for any
purpose.

The loan must be repaid in monthly instalments so the loan can be cleared by the end of the
tenure and the gold can be taken back to custody by the borrower. If the borrower fails to
make the repayments on time, the lender reserves the right to take over the gold to recover the
losses.

Loan Against Assets

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Similar to pledging gold, individuals and businesses pledge property, insurance policies, FD
certificates, mutual funds, shares, bonds, and other assets in order to borrow money. Based on
the value of the pledged assets, the lender will offer a loan with some margin at hand.

The borrower needs to make repayments on time so that he/she can get custody of the
pledged assets at the end of the tenure. Failing to do so, the lender can sell the assets to
recover the defaulted money.

Important Factors Lenders Look at to Approve your Application

 Credit Score

Credit score plays an important role in deciding whether the lender would like to go ahead
with your application or drop it off at the initial stage. This is especially the case when it
comes to unsecured loans.

Since a credit score represents the credit history of the borrower, the lender analyses the
repayment history of the borrower and concludes whether the borrower can repay on time or
will he default on payments. The loan approval is based on the lender’s judgement after the
necessary analysis.

 Income and Employment History

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Subs. by Act 58 of 1968, s. 5, for section 20 (w.e.f. 1-2-1969).
Your monthly or annual income and employment history plays a crucial role in loan approval
as well. Based on your income and income stability in the form of consistent and stable work
history, the lender may or may not get convinced that you will be able to repay the loan.

Even if you are self-employed, the lender assumes that your business is running well for the
past few years and your business’s turnover is satisfactory.

 Debt-to-Income Ratio

Not just having a good income, your debt-to-income ratio is also important. In case you have
an income of Rs.1 lakh per month and if your debt repayment commitments exceed
Rs.75,000 already, a new loan will not be provided to you as you will need the remaining
income to take care of your domestic expenses.

Therefore, irrespective of your income, you must have a low debt-to-income ratio so the
lenders can think that you have enough cash at hand every month to make the repayments as
well as handle the family expenses.

 Collateral

Based on the collateral you provide and its current market value, the lender may decide on
the interest rate applicable to your loan. Providing collateral will make the deal more secure
from the lender’s perspective, which may result in more trust and less interest rate.4 An
unsecured loan is infamous as it includes a higher interest rate comparatively.

 Down Payment

The money you have saved and the effective execution of your saving plan towards a down
payment will increase the lender’s trust in you. The higher the down payment, the lower is
the loan amount requirement.

Features and Benefits of Loans

 There are several types of loans categorised based on various factors.

 You can choose the type of loan you wish to take based on your requirement and
eligibility.
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Ins. by Act 1 of 1984, s. 23 (w.e.f. 15-2-1984).
  The lender will be the ultimate power to decide the loan amount they wish to offer to
you based on several factors, such as repayment capacity, income, and others.

 A repayment tenure and interest rate will be associated with every loan.

 The bank may apply several fees and charges to every loan.

 Many lenders provide instant loans that take a few minutes to few hours to get
disbursed.

 The interest rate is determined by the lender based on the Reserve Bank of India’s
guidance.

 The lender determines the requirement for security.

 A third-party guarantee can be used instead of security in some cases.

 The loan repayments must be made in equated monthly instalments over the pre-
determined loan tenure.

 There may or may not be the option for full/part prepayment.

 Some loan types and lenders may levy a penalty for prepayment of loans.

Eligibility for Loan

The eligibility criteria to get a loan varies based on the type of loan you are looking for.
Generally speaking, you may consider the following simple criteria to check your eligibility.

 A decent credit score

 Constant income flow

 Age between 23 years and 60 years at the time of entry

 A few assets such as FDs, investments, immovable property, etc.

 A good relationship with your bank

 A timely debt repayment history

 Documents Required

 Application form with photograph

 Identity and address proof

 Last 6 months’ bank account statement

 Latest Salary Slip

 Form 16

Loan EMI Calculator

A Loan EMI Calculator is a handy tool to calculate the monthly amount payable to the lender
as well as the total interest. To calculate the EMI applicable to your loan amount, all you
need to do is enter the values for principal Amount (P), Time duration (N), and Rate of
interest (R).

Types of Advances

Advances can be of multiple types. Here are some of the common types of advances:

 Overdraft: Banks allow you to withdraw extra money from your bank account compared to the
actual balance you have in your bank account.

 Cash Credit: Cash credit allows you to borrow money from the bank upto to the value of the asset
pledged. It’s a flexible way to access funds when you need them, and you repay based on your usage.

 Payday loans: Payday loans are instant loans, generally offered to salaried individuals for very short
loan tenure. The only requirement to avail of a payday loan is that if you must have a job. You can
repay the loan as soon as you receive your next paycheck.

 Bill Purchase: Bill purchases are commonly used by business entities, wherein they can receive funds
from the banks in exchange for keeping bills/ invoices as security.

 Differences Between Loans and Advances

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Let’s understand the difference between loans and advances on the basis of the following parameters.

 Eligibility: To be eligible for a loan, you must have a good credit score and history. Advances are
generally pre-approved based on your account usage patterns or existing deposits.

 Interest Rate: Advances are given for very short term and mostly given without any security. Hence,
it carries a high level of risk, and thus, lenders charge higher interest rates. On the other hand, loans
are given for long durations with fixed repayment schedules and are only given if you have a good
credit history. Hence, it carries a low level of risk and is given at lower rates than advances.

 Purpose: Loans are generally given for long-term financing needs such as buying a car, purchase or
construction of a house, family vacation, education expenses, etc. However, Advances are given for
immediate short-term needs such as temporary cash requirements, unexpected expenses, working
capital requirements, etc.

 Repayment Terms: Loans are repaid as per the fixed repayment schedule given at the time of loan
disbursement. Typically, loans are paid in EMI (Equated Monthly Installments), which are calculated
as per the agreed interest rate. (If you want to calculate EMI for your loan amount, you can use EMI
calculator to calculate EMI in simple steps). On the other hand, advances have flexible repayment
tenures and depend on the terms between the lender and the borrower.

 Risk: Loans are given on the basis of credit score and other factors such as income, employer,
location, collateral, etc. The risk in the loan is comparatively lower than advances, which have a
flexible approach to lending money and are typically given without any security.

 Processing Time: Loans involve a detailed form-filling process, KYC verification, address
verification, income verification, and other documentation work. Hence, it takes more time to process
the loan. On the other hand, Advances take less time to disburse as they are pre-approved and do not
require more documentation.

 Security: Loans can be given with or without security, depending on the type of loan you are
applying. However, most of the time, advances are disbursed without any security.

 Legal formalities: More legal formalities are required in loan processing as they are given for higher
amounts and longer tenure. On the other hand, advances require fewer legal formalities than loans.

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https://www.go-yubi.com/blog/loans-and-advances/
 Nature of Transaction: A loan is a debt facility taken for a higher amount and for a longer duration,
which needs repayment as per the loan schedule. However, Advance is the credit facility given to
fund immediate short-term emergencies. It is repaid as per the terms between lender and borrower.

Conclusion;

In conclusion, it is important to understand the difference between loans and advances. Loans are
long-term borrowings that are ideal for fulfilling high-value financial commitments. On the other
hand, advances are short-term credit facilities that are ideal for immediate financial requirements.

REFERENCES:

1. https://singledebt.in/blog/what-are-loans

2. Ins. by Act 1 of 1984, s. 23 (w.e.f. 15-2-1984).

3. Asstt.Cit-Central Circle- 1(3), ... vs M/S. Star One Realcon P. Ltd, Mumbai on 29 October,

2021

4. www.rbi.org.in