Loans – Types, Process and everything you need to know.

Loans are key aspects of any financial system. They assist general public and businesses reach their goals, be it purchasing a home, support for education, or initiating/improving a business. This article helps you to learn about Loans, from types to tips on instant loans.

Types of Loans

1. Personal Loans: These can be taken out by individuals for things like home improvements, vacations, or unexpected medical expenses. These loans typically have higher interest rates because they are given without collateral.
2. Home Loans: Loans secured by collateral that are obtained for the purchase of real estate. Longer payback durations and lower interest rates are typical.
3. Auto Loans: Loans for the purchase of automobiles for which vehicles are the security.
4. Education Loans: Provided to help students with their educational costs. The terms of repayment will be negotiable.
5. Business Loans: Loans intended to assist companies with operating expenses, expansion, or capital requirements. Both secured and unsecured options are possible for these.
6. Mortgage Loans: These are loans secured by a mortgaged property.

How to select the best loan option?

Selecting the right loan can be tricky, but keeping these factors in mind can make it easier:

1. Interest Rates: Compare interest rates from different lenders.
2. Loan Term: Your monthly payment amount and interest paid depends upon the repayment period. If you take a home loan with 10 years as tenure you need to pay high interest every month but you will pay less interest compared to a loan with 20 years tenure.
3. Fees and Charges: There could be hidden fees, such as processing fees, prepayment penalties, and late payment charges.
4. Flexibility in Repayment: Verify whether early or partial payments are permitted without incurring penalties.
5. Loan Amount: Make sure the loan amount meets your needs without going overboard, as this could put a strain on your finances.

Application Process

1. Verify your eligibility in accordance with the lender’s requirements, taking into account your employment position, income level, and credit score.
2. Keep all important documents ready, including identification, bank statements, tax records, and proof of income.
3. Complete the application form given by the lender and send it in with the all required documents.
4. Before granting the loan, the lender will examine your application, check the credit score, and documents.
5. The loan amount will be credited to your account upon approval.

Fees and Charges

These are some common charges and fees you would be paying:

1. Processing Fees: Charged for processing your loan application
2. Late Payment Fees: Needs to be paid if you miss a payment deadline
3. Prepayment Penalties: Charged for clearing your loan early
4. Service Charges: The sum of money required to keep your loan account open

Loan Repayment, Partial payment and Prepayment

Repayment means clearing your through monthly EMIs, which includes principal amount plus interest for the month. Credit score gets impacted if the due date is missed. Auto-pay options can be helpful here. Partial payment and Prepayment means paying outstanding principal partially or completely before the tenure. It will be helpful in saving money that you need to pay as interest. But, few lenders allow to pre-pay a loan with penalties. Always carefully read the terms and conditions in the loan agreement.

Loan EMI and Income

1. Financial experts often suggest that the total EMI should not exceed 40-50% of a person’s monthly income. For example, if your monthly income is ₹,50,000, your total EMI payments should be between ₹20,000 to ₹25,000. This gives you sufficient funds for all other expenses.

A Few Unknown Facts

1. Few individuals are aware that asking for several loans in a short period of time can have a bad effect on your credit score, even though most people are aware that taking out a loan might have an influence.
2. Some lenders provide early payback incentives, such lowered interest rates or fee waivers. If you have the money to pay off your loan early, this might save you a lot of money.
3. You might choose to transfer your debt if you discover a lender that is giving a cheaper interest rate than your existing loan. This might result in interest savings by moving the remaining loan balance to the new lender with reduced interest rates.
4. If you are struggling with loan repayments, some lenders offer loan restructuring options where they may extend the loan term, reduce the EMI, or even temporarily halt the repayments to help you get back on track.

Warning: Watch Out for Instant Loan Fraud

Instant lending applications and businesses that provide fast loans with little paperwork have been more and more popular recently. Although the ease of use is alluring, but you need to be cautious. Many of these rapid lending companies offer troublesome repayment plans and outrageous interest rates. Some borrowers have been caught in a debt cycle that has caused them to experience extreme financial hardship and, sadly, in certain circumstances, even death.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.