A loan is required for varied reasons by many people depending upon their needs. Popular amongst them are Home and Car loans. Loan approval goes through a procedure but the it is not that cumbersome. Do some research and get the best suitable loan that is available in the market.
Terms of loan, interest rates, duration and EMI all are the primary determinants and depend upon the type of the loan chosen.
Interest rates:Annual Percentage Rate is the real cost of the loan. So do not compare the loan on the basis of the interest rates. As a few might stand out to be cheaper as compared to the others, but APR gives a more clear picture. It takes into account not only the interest rate but also the processing fees, application fees etc. The lender can provide the APR. Banks also do the same to make the comparison easier. You may calculate APR using the following formula:
Fees+Interest/Principal
——————————– * 365*100
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Duration of Loan: A loan could be for a short or for a long term. Short term loans are for meeting some immediate needs and range from a duration of six to eighteen months. They carry higher interest rates as compared to long term loans. Short term loans should be preferred if you can pay a somewhat higher rate of interest.
Long term loans are for a period of not less than three years and are expensive though they allow you to repay over a long period of time. Interest rate component looks limited but the overall financial burden is more.
Total amount owed: when you choose a loan, consider how much loan amount along with interest and cost of fees remains outstanding. This can give a better picture to check whether a right kind of loan is chosen or not. At the end of the tenure you have to pay the total amount with a fixed/floating rate of interest. You should choose the loan which results in the least outstanding/owed amount over its duration. If monthly instalments are not burdensome, the latter option serves better.
Types of loans-
- Home loans and financing homes: Home loans are available in the range of 6.5-10%.when you buy a property, compare the rates offered by different Banks and choose the best available option. There are home improvement loans and they fund tilling, flooring and other internal or external renovations without changing the basic structure of the house.This is a secured loan.
Seeking home loans against your property is also possible. Banks do not prefer giving home loans to secure properties bought on Power of Attorney. Law does not grant ownership title to the buyer. Using some other acceptable collateral or a vanilla personal loan could be better in such situations.
- Personal loans: Such loans are granted based on the creditworthiness of the borrower. They are unsecured in nature and do not call for any collateral. The purpose behind getting such loans could be medical expenses, wedding expenses, expansion of business, renovation of house, educational purposes etc. These loans are more expensive in terms of interest than home and car loans. The procedure is hassle free and does not need too much information other than the details of the borrower, the purpose and amount of loan. Personal loans carry 10.5-24% rate of interest annually.
- Education loans: This category offers finance for educational purposes at a lower rate of interest ranging from 6-15.20%. The interest qualifies for deduction under section 80E of the Income Tax Act. Educational loans are available for a longer duration and are for any full time, part time or vocational course.A moratorium period is offered by banks up to a year and interest occurs on a simple interest basis.
Smrutirekha Bhoi