Loans have become an integral part of our financial lives. They give us the required funds to fulfill our dreams and aspirations. Also, loans give us the required liquidity in the face of crisis and help us overcome an emergency.
However, there are different aspects of loans knowing which can help you make an informed choice, more so if you are a first-time borrower. This article aims to serve as a beginner’s guide to loan lending and understand its various aspects. Let’s begin.
Different types of loans in the market
The loan market is filled with loads of offerings from lending institutions. You must understand them to opt for the right one. Every loan serves a specific purpose and the most common ones available are:
A personal loan is one of the most common types of loans available that you can opt for. This type of loan is unsecured, which means you can avail it without pledging any security to the lender. Be it addressing a medical emergency, buying a new gadget/appliance, or undertaking a vacation, a personal loan satiates a range of needs.
Easy to avail, all you need to do is to fill-up the form, submit a few documents related to your address, identity, and income, and upon successful validation, the loan amount is credited into your account within a few hours.
Professional loans are targeted towards people in different professions, including doctors, chartered accountants, architects, and engineers, among others. Most people in these professions are self-employed and need funds to expand their office, buy new equipment, and deploy the latest software to scale up operations.
A professional loan is tailored to meet these unique needs of individuals in the professions mentioned above. Just like a personal loan, a professional loan is unsecured, which makes it convenient to avail. The documentation process is also simple and straightforward.
If you are a businessperson scouting for funds to meet the working capital needs of your enterprise, a business loan should be on your radar. Business loans are tailored to meet the requirements of entrepreneurs. They are a prudent option to address short-term liquidity needs, purchase new equipment, stock up inventory, and expand the office, among others.
Similar to personal and professional loans, a business loan is unsecured, which makes it easy to avail, especially for new entrepreneurs who often find it difficult to arrange collateral.
As the name suggests, a home loan gives you the funds to buy your dream home. Offered by a range of financial institutions, home loans are generally long-term commitment with tenures ranging from 10 to 15 years or even more.
Note that in home loans, the home is the collateral. In other words, if you fail to repay the loan on time, your home may be seized by the lender.
Things to consider before opting for any loan
There are certain things that you need to consider before opting for any loan. Ignoring them can not only stretch your finances but also be a cause of major stress. They are:
A three-digit score ranging between 300-900, it reflects your creditworthiness. To put it otherwise, the score gives a tentative idea to the lender about the likelihood of loan repayment. Also, a high score helps in procuring the loan on flexible terms and conditions.
Lenders generally consider a score above 700 a good one. You can check your credit score from credit information bureaus and third-party websites.
Rate of interest
This is one of the essential considerations as it has a direct impact on the equated monthly installments (EMIs). The rate of interest is directly proportional to the EMI amount, which means higher the rate of interest, higher are the EMIs.
The rate of interest is on the higher side for unsecured loans compared to secured loans as the lender runs a greater risk of default.
This is another crucial thing to watch out for. While a long tenure reduces EMIs, it pushes up the interest outgo.
Therefore, you must opt for a tenure whereby not only you can pay the loan on time but also keep a tight lid on the interest component. Hence, choose the tenure with the utmost care.
Processing fees and other charges
Lenders generally charge a processing fee when you apply for a loan. This fee increases the overall cost of availing the loan.
Therefore, be mindful of it and also other charges such as late payment fees, foreclosure charges, and pre-payment charges, among others. Read the fine print thoroughly before signing.
Avail loans at the click of your fingers
Thanks to digitalization and the rise of fintech, today you can easily avail loans with a few clicks. There are many apps through which you can apply for the loan you want without visiting the office of the lending institution.
All you need to do is to fill up the application form and upload the required documents, and your loan is approved within a few hours. In fact, many lenders have their dedicated app through which you can apply for a loan within seconds from anywhere, anytime.
Before applying for a loan, figure out the exact amount you need and compare different offerings to make an informed choice. You can compare the offerings from multiple lenders on loan aggregator portals hassle-free.