Loans – Meaning, How They Work, Types, and Features

We may not always possess the funds necessary to undertake certain activities or purchase specific items. In such cases, individuals and organizations opt to borrow money from lenders.

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When a lender provides funds to an individual or entity with a certain guarantee or based on the trust that the recipient will repay the borrowed money with additional benefits, such as an interest rate, this process is known as lending or taking out a loan.

A loan consists of three components – the principal or the borrowed amount, the interest rate, and the tenure or duration for which the loan is taken.

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Most people prefer to borrow money from a bank or a reputable non-banking financial company (NBFC) because they adhere to government policies and are considered trustworthy. Lending is one of the main financial services that any bank or NBFC offers.

Categories of Loans

Secured Loans

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These loans necessitate the borrower to offer collateral for the funds being borrowed. If the borrower fails to repay the loan, the bank retains the right to employ the offered collateral to recover the outstanding payment. The interest rate for such loans is significantly lower compared to unsecured loans.

Unsecured Loans

Unsecured loans are those that do not demand any collateral for loan issuance. The bank evaluates the prior relationship with the borrower, the credit rating, and other criteria to decide if the loan should be granted. The interest rate for such loans can be higher as there is no method to recuperate the loan amount if the borrower defaults.

Education Loan

Education loans are financial tools that assist the borrower in pursuing education. The course could be an undergraduate degree, a postgraduate degree, or any diploma/certification from a respected institution/university. You need the admission ticket from the institution to secure the financing. The funds are available for both domestic and international courses.

Personal Loan

Whenever you face a liquidity issue, you can opt for a personal loan. The reasons for taking a personal loan can range from settling an old debt, taking a vacation, funding a downpayment for a house/car, handling a medical emergency to buying high-value furniture or gadgets. Personal loans are granted based on the applicant’s prior relationship with the lender and credit rating.

Vehicle Loan

Vehicle loans support the acquisition of two-wheeler and four-wheeler vehicles. Additionally, the four-wheeled vehicle can be new or used. Depending on the on-road price of the vehicle, the loan amount is determined by the lender. You may need to prepare a downpayment to acquire the vehicle as the loan rarely covers 100% financing. The vehicle will be owned by the lender until complete repayment.

Home Loan

Home loans are dedicated to securing funds to purchase a house/flat, construct a house, renovate/repair an existing house, or buy a plot for building a house/flats. In this scenario, the property will be held by the lender and ownership will be transferred to the rightful owner upon full repayment.

Loan Protection Insurance – Meaning, How They Work, Types, and Features

Meaning

Loan protection insurance is a financial product designed to protect both the borrower and the lender in case of unexpected events that may affect the borrower’s ability to repay the loan. These insurance policies are purchased before or at the time of taking out a loan and ensure that, in adverse situations such as job loss, illness, or death, the loan payments will be covered, preventing default and severe financial hardship.

How They Work

Loan protection insurance functions like a traditional insurance policy, where the borrower pays a monthly or annual premium in exchange for coverage. In the event of a covered occurrence, the insurance company will take over the loan payments or pay a specified amount, depending on the policy terms. This provides peace of mind to the borrower, knowing that their financial obligations will be met even during difficult times.

Types

  1. Life Insurance for Loans: Ensures that the outstanding loan balance is paid off in the event of the borrower’s death. This type of insurance is often required for mortgage loans.
  2. Unemployment Insurance: Covers the loan payments if the borrower loses their job involuntarily. This is useful for personal loans and mortgages.
  3. Disability Insurance: Pays the loan installments if the borrower becomes unable to work due to illness or injury. Common for personal loans and vehicle financing.
  4. Critical Illness Insurance: Provides a lump sum or covers loan payments if the borrower is diagnosed with a specified critical illness.

Features

  • Flexible Coverage: Policies can be customized to meet the specific needs of the borrower and the type of loan.
  • Variable Premiums: The cost of the insurance can vary based on the loan amount, the borrower’s age, and the type of coverage selected.
  • Direct Benefits to the Lender: In many cases, the insurance payments are made directly to the lender to cover the loan installments.
  • Waiting Period: Some policies include an initial waiting period during which benefits are not paid, ensuring the insurance only covers events that occur after this period.
  • Ease of Enrollment: Many loan protection insurances are offered at the time of loan origination, making it easy to enroll and incorporate the cost into the financed amount.

Loan protection insurance is a valuable tool for safeguarding both borrowers and lenders against financial uncertainties. It provides an additional layer of security, ensuring that financial obligations are met even in adverse situations. When considering a loan, it’s important to evaluate the available insurance options and choose coverage that offers the necessary peace of mind for your financial situation.

How to Apply for a Loan?

Applying for a bank loan is easier than one might expect. However, before you apply for one, you should be aware of your financial situation, considering you will need to repay the loan amount later.

First, understand your needs and if you believe it’s the right solution for you, you can either visit the bank and speak with the loan manager or bypass all that and apply online.

Step 1: Select the lender you want to borrow from based on your research and verify your eligibility.

Step 2: Go to the bank branch or their official website to apply for the loan.

Step 3: Provide or upload all the required documents and proofs.

Step 4: The bank will process your application and contact you to communicate their decision within the specified time frame.

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