Loan

In finance, a loanis the lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt provided by an organization or individual to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.

In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repayan equal amount of money to the lender at a later time.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral. A mortgage loan is a very common type of loan, used by many individuals to purchase things. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security – a lien on the title to the house – until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

We deals in following Loans:-

1. OD/CC Limit

A businessman has two options while taking a loan for his business. Either to opt for long term funding like LAP (Loan against property) or to go for flexible funding like Cash Credit (CC) or Overdraft (OD). Long term funding generally carries a lower rate of interest while flexible funding gives opportunity to save interest by depositing extra funds in the account and thus paying interest only for amount needed.

CC= Cash Credit Limit OD=Overdraft Limit

Cash credit is a cash loan given to a company. The bank provides the funding only after they acquire the required security to secure the loan. When the security has been provided, the company can continuously draw money from the bank to the specified limit set by the bank.

In India, cash credit is offered to businesses to finance their working capital requirements. The businesses can buy raw materials, machinery or buildings. The cash credit account is very much similar to the current account. But current account allows overdraft facility occasionally whereas cash credit account is supposed to be overdrawn continuously. The overdrawing limit will be set by the bank and the limit is sanctioned based on the working capital requirement of the company minus the margin.

Overdraft and Cash Credit account both are the type of loan accounts in which the account holder can withdraw the amount he requires . These generally are considered as similar type of loan by many,yet there are some differences between them.

Cash Credit Account/ Overdraft Account
It is normally given on security of stock, debtors etc. It is normally given on security of a fixed asset.
The maximum amount is calculated as a percentage of sale and stock along with financial statements. For eg A bank allowed cash credit upto 80% of stock plus 20% of sales. The maximum amount allowed is calculated mainly on basis of financial statements and security.

It should be used for the purpose of business. Can be used for any purpose.

Balance Sheet, P & L account , VAT reports is required be submitted to bank generally annually or quarterly. Financial statements are generally not required to be resubmitted after approval.
It doesn’t reduce over time. There is a monthly reduction in amount of overdraft protection in Dropdown Overdraft (DOD).

Insurance of stock is normally required. Insurance of the property is generally required.

Many a times new account has to be opened to take cash credit facility. Overdraft is generally started by banks in existing current accounts.

Interest rate is normally lower than overdraft account. Interest rate is normally higher than cash credit account.

Banks do not advance 100% of the value of underlying securities when they sanction you a CC/ OD limit.

CC or Cash Credit is the limit upto which a bank is willing to give cash as a short term borrowing to a company.
It has nothing to do with the Current Account of the Business.

CC Limit varies from bank to bank and customer to customer based on their Creditworthiness.

OD or Overdraft Limit is the excess withdrawal over the Current Account Amount.
Every Current A/C Holder enjoys this facility, wherein they can borrow in excess of their funds in the account
This limit is enhanced or reduced based on the Customer’s Credit worthiness.

The difference between the value of the security pledged and the overdraft / cc limit available to you is called as Margin Money.

This is sort of safety cushion for the bank. For e.g. if you pledge Fixed Deposit Receipts of Rs.1,00,000/- you will be sanctioned say 80,000/- as your OD/CC limit.

Thus 20,000/- is the Margin Money. You can also view margin money as your contribution/stake in the facilities granted to you by the financial institution/bank.

2. Business Loan

Business loanhelps traders, businessmen and professionals to start or expand their commercial activities. The loan can be secured against a collateral in the form of property, finished goods, etc or can be availed without keeping any collateral security. This unsecured business loan is more expensive than secured business loan.

Business Loan can be availed for all business purpose like working capital requirement, purchasing of fixed assets, capacity expansion/ modernization, technology up-gradation, Research and Development or any other short-term requirement.

3. Home Loan

Whether it is your first step towards owning that dream home for your family or transferring your existing home loan from another lender for better terms or buying a property for investment, it is very essential to get the right loan that is best suited to your requirement at the right cost.

A little knowledge about home loan and what is being currently offered in the market will go a long way in getting that best deal on your home loan.

But before you proceed to meet the lender, it is beneficial to have some knowledge about the product, even though you may have an earlier experience of availing the home loan. Some of the key points are listed below for your consideration before you approach the lender for home loan.

Purpose of Home Loan

Lenders generally finance for –
1. Buying under-construction / new or resale residential property
2. Construction of house
3. Buying a plot of land for construction of dwelling unit
4. Renovation and Extension of exiting residential property
5. Refinance of existing home loan

4. Loan Against Property (Mortgage Loan)

You need a loan of 20 lakhs. Your salary doesn’t allow you to borrow that much from a bank. But you do have your own home in a good locality that can fetch a good market price. Lenders will now be more amenable to lending to you.

A loan against property (or home equity loan) is a credit instrument where a loan is given against your property. You can then utilize these funds to meet any of your requirements. What you need to know before applying for a loan against property (LAP). Here are a few basics that will help you while researching LAP.

5. Personal Loan

Personal Loans are usually of two types i.e. secured personal loan which is secured against the mortgage of securities, high surrender value insurance policies, gold, etc and another is unsecured personal loan which does not require you to mortgage anything.

Unsecured personal loans do not require you to provide any collateral security, though some PSU banks may insist on a third party guarantee. Unsecured personal loan can be taken to finance any short-term requirement like oversea trips, marriage, medical emergencies, etc. The only condition is that the personal loan should not be used for speculative purposes.

Personal loan is a simple hassle free process of funding your personal requirement with minimal documentation and within quick time. In India, Banks as well as Non Banking Financial Corporation (NBFC) finance personal loan.

Personal Loan is commonly known as all purpose loan it can be uses for fulfilling various legitimate personal needs that includes:-

  • Higher education for self, children, etc.
  • Marriage in the family
  • Dream vacation
  • Festival expenses
  • Medical emergencies
  • Furnishing or renovation of house
  • Purchase of high end consumer goods
  • Purchasing of high end lifestyle products.