What is a Loan? A Simple Explanation for Beginners

Emergencies or unexpected costs can crop up when we least expect them. In such cases, many either scramble to tap savings or borrow from family and friends, potentially straining relationships. But a better solution to weather these storms without depleting savings or fracturing ties with loved ones is taking out a loan.

If you're unfamiliar with loans and have wondered, "What is a loan?" you're not alone. A loan is a sum of money borrowed from a financial institution that must be repaid over time, typically with the agreed interest. It provides quick access to substantial funds to fulfil your financial obligations.

This blog post will delve into what is a loan, its types, eligibility requirements, necessary documents, and the loan process.

What is a loan?

A loan is a certain amount borrowed from a financial institution with the promise of repayment over a specific period. The lender provides you with the funds you need, and in return, you agree to repay the principal amount, along with interest, in instalments or a lump sum.

Loans can be broadly categorised into secured vs. unsecured loans.

Secured loans: These loans require collateral to secure the loan. If a borrower fails to repay the loan, the lender can claim the collateral to recover their money. Home loans are a prime example of secured loans.

Unsecured loans: These loans, on the other hand, are not backed by collateral, which means you don't have to pledge any assets as security. Lenders approve unsecured loans based on your credit score and financial history. Personal loans are a common example of unsecured loans.

Based on the purpose, loans can be further divided into different types of loans.

Personal loans are versatile and can be utilised for various financial needs, from consolidating debt to covering medical expenses. These loans don't require collateral; instead, the lender looks at your credit score, job stability, and repayment history to decide whether to approve them.

Home loans are a type of secured loan specifically for buying real estate. In the case of a home loan, the property you're purchasing serves as collateral itself.

Student loans are designed to help you pay for education-related costs like tuition, books, and living expenses. They often come with lower interest rates and flexible repayment terms to make education more affordable.

Business loans are for entrepreneurs looking to start or grow their businesses. These loans come in various forms, including small business loans, equipment loans, and business lines of credit.

Vehicle loans are the loans secured to purchase a car or a two-wheeler. Depending on your credit history and the lender's rules, these loans can be secured or unsecured.

How do loans work?

Loans offer several benefits:

Financial flexibility: Loans provide you with financial flexibility to meet immediate needs, whether it's a medical emergency, educational expenses, or a new home.

Flexible loan tenure: You can choose the loan tenure that suits your financial situation. Longer tenures typically result in lower monthly payments, while shorter tenures lead to higher monthly payments.

Multi-purpose:  Loans offer substantial funds that you can use to cover unexpected medical expenses, address emergencies, expand your business, or make luxury purchases.

Tax benefits: Certain loans, particularly home loans, offer tax deductions on the paid interest. For housing loan repayments, you can claim a deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act.

Eligibility requirement for a loan

Now that we understand what is a loan, let's look at its eligibility requirements. The requirements for qualifying for a loan differ depending on the type of loan, but there are some common standards:

#1. The applicant's age should fall between 22 and 58 years.

#2. A consistent monthly income, usually at least Rs 15,000, is required.

#3. A minimum of one year of work experience is necessary.

#4. A favourable credit score is a prerequisite.

#5. Maintaining a history of timely debt repayments is essential.

Meeting the minimum criteria in areas such as income, employment, credit rating, and repayment history helps establish creditworthiness for loan approval.

Documents required to apply for a loan

While the specific documents required may differ from lender to lender, the standard documents required are the following:

For salaried employees

- Application form with a recent photograph.

- Address and identity proof, like Voter ID, Passport, Driving License, or Aadhaar Card.

- Salary slips for the last two months.

- The last six months' bank account statement.

For self-employed applicants

- Application form with a photograph.

- Identity and address proof.

- Proof of business, such as company registration license, tax registration copy, or shop establishment proof.

- Savings and current account statements for the past year.

- Income tax returns filed for the preceding year.

How to apply for a loan?

Applying for a loan is straightforward in today's digital world. You can initiate the loan process online from the comfort of your home. Below are the typical steps to apply for a loan:

Step 1: Research lenders and check if you meet eligibility criteria.

Step 2: Go to the lender's website and click the loan application link.

Step 3: Fill in your personal and loan details like name, address, contact number, desired loan amount and tenure.

Step 4: Upload all required documents and proofs.

Step 5: Carefully review all entered information.

Step 6: Submit the completed online application form.

Once the lender is satisfied with the details provided, they will approve the sanctioned amount and disburse it into your account. Alternatively, you can visit the bank's branch to apply for a loan.

Conclusion

By now, you must be well-equipped with "what is a loan." Loans are a fundamental financial tool that can help you achieve various goals and manage your financial needs. Whether you need a personal loan to cover medical expenses, a home loan to purchase your dream house, or a business loan to expand your enterprise, loans provide the financial support necessary to make your dreams a reality.

If you require loans to meet your financial requirements, turn to Tata Capital Moneyfy. We offer various types of loans tailored to your specific needs. Our loans come with flexible tenure, high loan amounts, a convenient digital application process, and easy-to-meet eligibility criteria. Visit the Tata Capital Moneyfy website to know more or download the Moneyfy App.