How to Assess Among the Different Options for Loans – Metrics and Methods

Most lenders have understood the wide variety of reasons why individuals and businesses take a loan. Today, loan products are so versatile that they cover almost every sphere of life and every need that can be fulfilled. A loan can be availed for an education, home, an automobile, to travel, pay for a wedding or to enhance your business prospects.

Lenders offer a loan with certain prerequisites, the most obvious one is the borrowers ability to repay. This is majorly dependent on the Credit score or the CIBIL score. Therefore, keeping a healthy credit score of 750 or above is always beneficial to a lender. Another important thing for borrowers to be aware of while applying for a loan is the interest rate applicable (or payable), as this will determine the Equated Monthly Installment or EMI. A delay or non-payment results in late fees and an adverse effect on the CIBIL score.

The Metrics of the broad category of loans available along with the generic method to avail them are given below:

  1. EDUCATION LOANS:

Education costs has been rising for a long time, and today, many students turn to an education loan to acquire a set of skills and knowledge for a particular subject or industry.

 

Eligibility Factors – They are available for full-time graduation and post-graduation programs in many disciplines such as engineering, architecture, medicine management and pure sciences. Applicants have to be in the age group of 16-35 years to apply for a loan.

 

What is Covered –  Under this loan, the tuition fees of the educational institutions, examination-library-hostel charges, travel expenses, purchase of books, equipment, uniform, and some other lender specific options (e.g. two-wheeler) are covered.

 

The Range of the Loan – Typically, the range of education loan is from 11.25% to 13.5%. Banks provide about 80% of the amount the actual expenses required. The borrower has to arrange for the remainder of the 20% on their own. It is known to be margin money.  The processing fee ranges from 2.25% to 2.50%. The tenure is 10 years for a loan of upto 4 lakhs and 12 years for more than 7.5 lakhs.

 

Documents Required – The common set of documents asked by lenders are: proof of admission, schedule of fees from the institution, marksheet of previous qualifying examination and photographs. If the applicant is earning then a Bank account statement, the assessment of income tax for the last 2 years, proof of income, and the statement of assets and liability are required.

 

Benefits – For a certain amount (up to 4 lakhs), lenders usually do not require any guarantors or security but beyond that amount guarantor or security would be required. Though a borrower can seek rebate under Section 80E of the Income Tax, it is limited to the interest payable. This deduction can be availed for a period of seven years.

 

  1. PERSONAL LOANS:

An illness, home repairs, travel, a wedding, etc, all require funds, and today, people don’t need to worry. They can turn to personal loans.


Factor of Eligibility:
An applicant should be between the age of 25-58 years to apply for this loan. It requires a credit score of around 750 or more. Most lenders expect employment of a minimum of three years with minimum of 3 months with the current organisation.

 

What is Covered: Lenders do not ask for a reason for a personal loan. There is however a requisite – the money disbursed is to be used to meet personal expenses and cannot be used for any speculative investment or expenditure.

 

Documents Required: KYC Documents, Employee ID card, Salary slips of last 12 months. Bank account statement for the last 3 to 6 months, are the major documents required


The Range of the Loan:
In comparison to other loan types, personal loans charge a higher rate of interest – usually in the range of about 10.65% to 21% p.a. Interest rate charged can be fixed or floating. There is a processing fee which ranges from 0- 5%. Depending on your eligibility, a loan amount of up to Rs. 30 lakhs can be availed.  Prepayment of the loan is chargeable, the fees for which can range between 0-4%. A personal loan tenure is for 1-5 years.


Benefits:
These loans are also called as signature loans or unsecured loans, because no collateral is required to avail them. These loans are not considered income and hence, there is no tax levied on the loan. Tax deductions can be availed on payment of interest for up to Rs. 30,000/-.

 

  1. Business Loans:

 

Businesses are unique and so are their requirements. Keeping that in mind, lenders provide customized solutions for various businesses and their needs.

Eligibility Factor: Individuals between the age of 21 and 58 years can avail this loan. The other eligibility factors are a minimum turnover of Rs. 40 lakhs, experience in the current business – a minimum of three years, total business experience should be minimum of 5 years, and the business should have profits in the last two years. Minimum annual income ITR should be Rs.1.5 lakhs.
Who all can Apply: If you are a self-employed professional (doctors,engineers, architects, etc.) or Self-employed non-professionals (Entities, such as partnerships, LLPs, Private limited co., closely held limited companies) then you can apply for these loans.
What is covered – A business loan can be availed to meet working capital needs, funds for machinery, equipment, expansion needs and to set up an office.

 

The Range of the Loan – The lowest amount of business loan is Rs. 50,000 and it can go up to Rs. 75 lakhs. Loan tenure is from 12-60 months. The interest rate applicable is in the range of 16 to 35%. Loan Processing charges can be up to 2.5%.
Documents required:  They are: PAN card of the firm or individual, Identity proof, address proof, bank statement for the last 6 months, Last ITR, proof of continuation, certified and true copy of Memorandum and Article of Association.
Benefits – The IRS deems a interest payable on a business loan to be a legitimate business expense and hence it falls under the purview of tax deductibles.

 

  1. Home Loans:

The early part of the 21st century saw an unprecedented increase in the price of immovable property. Most salaried people find it impossible to buy property from their regular income streams and therein lies the need for a home loan – to own a dream home.

Eligibility factors: The eligibility required for home loan are: You should be an local citizen, your age should be between 25 to 58 years of age, you must be a salaried person and your work experience must be minimum 3 years.

 

What is covered – From apartments and flats to loan to buy plots or construct a home are all covered under home loans. CLP or construction linked plans are available for builder flats as well as construction of own homes.

 

The Range of the Loan: The interest rates have been revised in the recent years due to inclusion of MCLR. The interest rates vary from 8.25% to 14%. A Home loan amount that an applicant can avail ranges from Rs.30 lakhs to Rs.10 crore for a tenure of 5-30 years. The processing fees applicable ranges from 0.50% to 1%.   Banks only lend 75% to 90% of the actual price of the house.

Documents required: KYC documents, Address proof, identity proof, photographs, Form 16/latest salary slips, bank account statement for the last 6 months are documents a lender will ask an applicant to submit.

Benefits: Home loans come with a host of tax benefits. There are deductions for interest (a maximum of Rs.2 lakhs under Section 24), principal repayment (a maximum of Rs.1.5 lakhs under Section 80C), and stamp duty and registration charges (overall limit of Rs.1.5 lakhs under Section 80C itself in the same year). There are deductions for first time home buyers as well under Section 80EE.

  1. Car Loans:

 

Despite the development of metro rail services in many Indian cities, many people continue to be dependent on their own automobile. A car loan can be beneficial for those looking to purchase a car.

Eligibility factors: Most lenders approve a car loan for applicants between the ages of 21-75 years. The minimum required income is 1.5 2 lakhs p.a. depending upon the automobile model. The DTI ratio should be less than 35%.

What is covered: You can purchase a vehicle for yourself. The taxes, fees and additional costs are included in the car loan. It normally does not cover the insurance and registration fees, however, some lenders might cover it under special schemes.

The Range of the loan: You can avail this loan for 12 months to 60 months. Although, there are a few lenders who can give a loan for a tenure of up to seven years. Interest rate ranges from 9.25% to 14.74%. The amount provided by lenders is 85% ex-showroom. The processing fees is around 0.04% of the cost of the car. It is also sometimes charged at around Rs. 10,000/- whichever is lower.

Documents required: Photo ID and age proof, signed application form with a photograph, residence proof, Bank Statement, and your income should be as per the lenders requirement.

Benefits: Salaried individuals can avail no tax benefits. But a businessman or a self-employed professional can get depreciation benefits.

  1. Two & Three Wheeler Loans:

Two and three wheelers are a popular mode of transport across the cities of India. People looking to own them can depend on  specifically designed loans to buy a vehicle that suits their needs.

Eligibility factors:  Generally, you must be at least 21 years old and less than 65 years old. Lenders usually require you to a resident for a minimum period of one year in the city you are applying for the loan. You should be work history of at least one year. Lenders also require applicants to have landline number either at work or at residence.

What is covered: You can avail most motorcycles, scooters  and three wheelers which are available for personal/commercial use in India.

The Range of the Loan: Interest chargeable on the loan can be from
23% to 30% while the tenure can be from 1 to 5 years. The maximum processing fees is about 3%.

Documents required: Basic documents such as the Proof of address and identity along with income proof and bank statements are required by lenders.

Benefits: If you are buying a three-wheeler, the loan can help you start your own service and pay off the installment from your earnings. Most lenders do not require a guarantor while processing these loans. These loans can let you purchase your two-wheeler or three-wheeler with ease.

  1. Gold Loans:

In India, women traditionally buy gold as a means of investments and for its aesthetic use. They could pawn their jewellery when in need, but today, men and women can take loan against gold.

The process of availing a gold loan:
It is quite fair and simple. A lender will carry out a valuation of the gold ornaments and offer a loan against them. They will consider the gold for its purity, and weight. They may also ask you to provide the proof of ownership of the ornaments you have pledged.  Once you have followed the process completely, the loan amount will be disbursed to you.

 

The Range of the Loan: The interest ranges from about 12% to 16%. The tenure for these kind of loans is  1 to 5 years. The processing fees of Gold Loans is about 1%. Like most other types of loans this loan too  covers about 80% of the value of the gold that you are providing.

Benefits: These are available to  a large number of people. Not too much of documentation is required for  a Gold loan. The loan has lesser interest rate when compared to other loans along with quicker loan processing and disbursal. Usually, there are no foreclosure charges and no income proof is required. A poor credit score does not matter. Most importantly, the gold that you take the loan against is safe in its vault as the onus of security of the gold is with the lender.

  1. Loan against Shares:

This type of loan is available against bonds, shares, insurance policies, etc. that you may have with you. The needs could be both personal and business.

Eligibility factors: The criteria is that this loan is that you should own loans in your name and your age should be more than 25 years at the time of sanctioning of the loan. Loan against shares are essentially short-term loans. The loan amount can be up to Rs.20 lakhs. The list of securities may vary from lender to lender.

What is covered: You can get finance on your shares, mutual funds, insurance, or bonds and meet most of your financial requirements with that money.

The Range of the Loan: The loan repayment tenure is one year to three years. The interest rate ranges from 9% to 12%. The processing fees is about Rs. 500/- for digital cases and for non-digital cases it is minimum Rs.3500/- or up to 1% of the sanctioned loan amount.

Documents required: Proof of stock ownership, Address proof, Form 16, Income proof in the form of salary slips, photo identity proof, proof of appointment in the form of your appointment letter, and DEMAT account and your Bank statements.

Benefits: This loan does not depend upon the credit score of the borrower, rather it depends upon the security that has been submitted. The shares also act as a collateral in case of non-payment.

  1. Loan against FDs:

A fixed deposit is a safe investment vehicle that parks your money for a fixed amount of time while giving you a fixed return on investment. However, you can take a loan against your FD instead of ‘breaking it’ before it reaches maturity. Loan against an FD is also referred to as overdraft.

Eligibility factors: You can easily avail a loan facility against your FD irrespective of your credit score. But you must have a FD account. Your age should be more than 21 years. The FD itself is held as a collateral in case you avail a loan against your FD. FDs in the name of minors cannot be used to avail a loan.
What is covered: With this facility you can cover all your financial needs without having to break your FDs.

The Range of the Loan: The interest rate charged is just about 2% to 3% more than the FD interest rate.
The tenure depends upon the maturity of the FD and it cannot exceed the term of the FD – in other words it is available only for the remaining tenure of the FD. Processing fee is nil.

Documents required: Application form, FD details including receipts dispatched in favor of the bank, a cancelled cheque in case of other than Banks, agreement letter with your signatures on it, passport sized photographs, and identity proof.

Benefits: Benefit of this facility is that the interest rate charged is much less when compared to other traditional interest rates. Additionally, you can take a principal amount as per the amount in your FD, thus ensuring your ability to repay the loan without much hassle.

 

  1.  Loan against Property:

 

This type of loan is exactly what the name implies. It means that this loan can be availed by pledging  a property as a collateral.

Eligibility factors: There are no set criteria for these loan types. Hence, a thorough research on your part is essential to avail the loans. However, the most common criteria are that the applicant should be a resident of India with a minimum age of 25 years.

 

What is covered: The property can be a residential one, commercial or a plot of land. The loan can be availed by mortgaging the property with a Bank or NBFC.

Range of the Loan: The range of the loan is from Rs. 5 lakhs to Rs. 5 crores. The tenure ranges for upto 15 years.  Processing fees is about 1% of the loan amount. Amount of the loan that can be availed is relative to the property and only 40 to 60% of the current market value is being provided by lenders.

Documents required: Some of the documents required are KYC documents, Bank account statement for last 6 months, ITR Balance sheet, P&L account statement for last 2 years. Business continuity proof of last 5 years. Copy of the ownership papers of the property that is to be mortgaged is also considered essential.

Benefits: The interest rate charged is lower than the Home Loans. Consequently the EMI is lowered. If you make a prepayment then the charges for the prepayment is nil or low.

 

In conclusion, the loans mentioned above are not a complete list but just some of the most used and popular ones. Even within these broad categories there would be sub categories, for example, there are business loans designed for doctors. All the loan types are available with banks and NBFCs, but terms and conditions by a bank are likely to be more stringent than an NBFC. However, there is no denying that a borrower has to do a thorough research before opting for a loan. They have to calculate the EMIs payable and choose a lender who meets unique requirements be

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