What is a Personal Loan?
Personal loan is usually availed by a salaried person and is a short to medium term unsecured loan i.e. without collateral that a customer can use to meet current financial needs. The funds can be availed to meet expenses related to payments of credit cards, vacations, unexpected medical expenses, marriage and down payments. Tenure of Personal loan is usually between one and five years.
Benefits of Personal Loan:
- It is the best-fitted way to smoothen up cash flow during times of stringency.
- Minimum documentation since processing is fast because there is no legality involved.
- It is an unsecured loan which means a loan offered without keeping any asset as security like a house or investments or any insurance as collateral.
- In case, a customer has more experience or is working with an MNC or has good credit history, rate of interest is lower.
- The repayment time period is fixed and ranges from 1 to 5 years. The loan gets completed in short tenure.
- This is useful when a customer is in urgent need of funds.
What is Home Loan?
Loan availed for purchasing new residential property from a builder or old from a seller (resale) or directly from a society comes under category of home loan. Usually such property is for self occupied by the customer or it can be an investment property.
Types of Housing Loans:
Common types of housing loans with various Banks and NBFC’s are:
- Home Purchase Loans: As evident by the name, this type of home loan can be availed when you wish to buy a new home.
- Self-Construction Loan: This type of loan is availed when you buy a piece of land for constructing residence. Here you can either purchase a land and construct a house on it or in case you have a plot, you can avail loan for constructing a house. If you take a loan for buying land, there is a pre-condition that you need to start construction of house within 6 months of taking a loan.
- Home Improvement Loans: Once you own a house, it calls for repairs and renovation as well and you can avail Home improvement loan for it. This loan is at a lesser rate of interest since it is a type of housing loan.
- Home Extension Loans: Lot of societies has been granted an extra FSI (floor space index) and they redevelop to utilize the same. Here you will get an extra area adding more space to you house and for which you can avail Home extension loan. This again comes at a lesser rate of interest.
Benefits of Housing Loan:
- Housing Loans are long term finance hence monthly burden of payment is less
- Rate of interest is lower since it is backed by security
- Usually for a self-employed, tenure is 15 years and for a Salaried, tenure is of 20 years.
- Co-applicants/joint-applicants can be part of the loan to increase loan amount.
- The funds are used for purchasing a new or an old residential property
- Collateral is usually the property that is being funded.
- Interest rates are flexible being either Fixed, Floating or a combination of fixed and floating as per options given by financial institutions
- Home loan interest rates are lower when compared to unsecured personal advances.
- Usually Banks grant 80% of the agreement value upto loan of 75 lacs. For loans above 75 lacs, the funds granted are upto 75% of the agreement value. This is a tentative loan to value ratio, final will depend on Banks and NBFC’s.
- Repayments are done by way of EMIs (Equated Monthly Installments).
- There are no foreclosure charges on housing loan if a loan is taken in individual name.
- Pre-payments are allowed, to reduce liability.
- You can avail home loan tax benefits under section 24 of the Income Tax Act. When you take a home loan,tax exemptions of up to Rs.1.5 lakhs can be claimed for interest component of EMI paid, along with Rs.1 lakh of principal paid during the financial under the Section 80 C of Income Tax Act.
- Tax benefit on the principal can only be claimed if applicant is residing in the house for which the loan has been taken.
- If spouse is a co-applicant within the home loan then both the applicants can double their tax benefits. While computing tax under the above mentioned sections of Income Tax Act, the applicant and the co-applicants, both are separately eligible for both interest and principal tax benefits
What is Business Loans?
A business loan can be availed by a business man to take his business to next level and earn huge profits.It is basically a loan availed by the borrower with the intention of using it for expanding an existing business and infuses capital. This is an unsecured loan wherein no collateral is involved.
Types of Business Loans:
- Surrogate loan:A term or an overdraft funded basis the track record of the current running loans of the customer is known as surrogate business loans.
- Financial based loan: A term loan or an overdraft funded basis three years financial performance of the customer is known as financial based business loans
Benefits of Business loans:
- Immediate fund requirement fulfillment so that an important transaction or an order can be completed in Business
- Shorter tenure since it is unsecured funding
- No collateral required
- Fast processing
- Minimum loan amount can be availed even without submitting financials in surrogate schemes of various Banks.
What is Loan against Property?
Loan availed on existing Residential or a Commercial Property for investing or expansion of business is categorized into Loan against property. This is secured loan for a higher tenure.
Types of Loan against property:
- Loan against residential property: This loan is availed by a borrower by mortgaging his existing residential property and utilizing funds for expansion of his business
- Loan against commercial property: This loan is availed by a borrower by mortgaging his existing commercial property and utilizing funds for expansion of his business
- Loan for purchasing commercial property: If the borrower wishes to purchase a commercial premises, he can avail such loan. He may buy such premise for self use as his office or for investment purpose.
- Lease Rental Discounting: Borrower can avail loan on the property which he has given on rent to any MNC, Banks, Public ltd company etc. He must get into a registered agreement with them mentioning fixed monthly rental along with lease tenure. The borrower can then discount those rentals with the lender and can avail a loan based on future income of rentals.
- Overdraft Loan: If the borrowers business is such that he requires money for his working capital, he can avail overdraft facility for Banks by mortgaging his residential or commercial premise. In such facility, a borrower has the benefit of paying only interest on the utilized amount rather than a fixed monthly installment every month. Bank provides a limit to the extent of loan amount sanctioned to the borrower and borrower utilizes funds as per his requirement in his business.
Benefits of Loan against Property:
- Funds available for expansion of business by mortgaging property.
- Higher tenure mainly 10 years hence monthly burden of payment is reduced.
- Rate of interest is generally lower than an unsecured loans or market loans
- 60% of the market value is funded by Banks subject to credit worthiness of the customer
- Quick and hassle free process with speedy approvals
- Residential as well as commercial properties are accepted as collateral to get loans
- Income of two or three businesses also can be clubbed to increase the loan amount
Purchase of Commercial property
- Commercial purchase can be classified into two types- (A) An office space and (B) Retail outlet which can be ready to use or under construction.
- If the property is under construction, then the agreement value is also considered by Banks or lenders.
- Usually lenders consider 60%-75% of the agreement value if market value of the property is high and agreement value is less.
- In case both the values i.e agreement and market value are same, Loan to value ratio is 60%.
- Banks consider under construction commercial property as risky hence rate of interest is high
- Processing fees is also high in such cases.
- Generally the end use of purchasing commercial property should be self use. If the property is to be given on rent or bought as an investment, risk for lenders is high. In such cases, few lenders may fund.
- Lenders are very specific about the builder's profile when it comes to under-construction commercial property. Whether the commercial property will be ready on time is of utmost importance.
- Tenure of such loans are higher than residential purchase loans.
It refers to that part of the firm’s capital, which is required for financing short-term business needs.
It basically means:
- Fund is required for day to day working
- Funds required for day to day working :
- Payment to suppliers of raw material
- Payment of other manufacturing expenses
- Payment of interest
- Payment of salaries
- Payment of taxes
What do you mean by Working capital gap:
- Working capital gap indicates the remaining amount of funds required by a business man to run his business with profits.
- Banks usually fund the amount after finding out the difference between current assets and current liabilities.
- Thumb rule for finding Working capital Gap = CA - CA
- Facility of cash credit or an overdraft is usually given by banks after analyzing of working capital gap
- Various Ratios such as current ratio, quick ratios, DSCR etc. are also taken into consideration.
- Common and most used method is Maximum Permissible Banking Finance – MPBF.
- The above calculator will give you an indication of working capital gap via MPBF method
Financial ratios provides assistance in accessing the heath of the business and this in turn will lead to the decision of the loan
Current Ratio : Current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. Current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities.
Quick or Acid Test Ratio: Acid-test or quick ratio measures the ability of a company to use its quick assets to retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. A company with a quick ratio of less than 1 cannot currently fully pay back its current liabilities. Hence this is an important ratio to be considered while funding working capital.
Debt to equity Ratio: The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. This ratio indicates leveraging hence the ratio is also known as Risk, Gearing or Leverage. Total Debt / Equity is a measure of all of a company's future obligations. long-term-debt-to-equity ratio which uses only long-term debt in the numerator instead of total debt or total liabilities. Total debt includes both long-term debt and short-term debt.
Inventory turnover Ratio: Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time. It basically measures how fast a company is selling inventory and can be compared against industry averages. A low turnover implies weak sales This is important aspect for the Banks. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand.
Eligibility basis more than one income
Eligibility for Business
- Banks also add various co-applicants income in order to enhance the eligibility.
- Income of partnership firm or a private limited company can also be taken into account and accordingly the eligibility will be reflected.
- If there are two separate business income, the same can also be added and one of the business income can be considered as applicant and the other as co-applicant. The eligibility calculation will not be affected by making any business as applicant or co-applicant. The total income/profit will be considered for final eligibility.
Eligibility for Salaried
- In order to enhance the loan eligibility, a salaried customer can add income of his relative/wife or parents as well.
- The income of all the co-applicants can be considered for loan amount
Eligibility for Professional
- Banks also add various co-applicants income in order to enhance the eligibility in case of professionals.