The Beginner’s Guide to Loans

In today’s era, everyone is chasing their dreams, some small & some big. Sometimes one may desire to have a dream home or a foreign tour, to start a business or to study abroad and so on. However, it is not necessary that every person will have enough money to fulfill his/her dreams. Well, if it is the financial situation that is stopping you to live your dreams, we got the solution to this problem.

You can either get a loan from the bank or from some financial institute. Banks and Financial institutes provide various loans such as Personal Loans for personal needs like large purchases or emergency expenses, Business Loans for startup wanting to start a business or to expand the existing one, Home Loans for buying a new house, Vehicle Loans for purchasing a vehicle, etc. One can avail these loans from a government/ private bank or a Non-Banking Financial Company (NBFC).

While banks and NBFCs both are key financial intermediaries that offer almost similar services to the customers, there some remarkable differences between the two.

Sl. No. Banks NBFCs
1 Banks are registered under Banking Regulation Act, 1949. NBFCs are incorporated under the Indian Companies Act, 1956
2 Bank accepts demand deposits (money deposits into bank with funds that can be withdrawn on-demand any time. It is high liquidity and considered as good as money). NBFCs can’t accept demand deposits.
3 Bank will provide the deposit insurance covered under RBI. NBFC will not provide the deposit insurance.
4 Banks are supported by payment and settlement system (It is covered by Payment and Settlement Act, 2007(PSS Act), legislated in December 2007 and regulated by the RBI). NBFC cannot avail the payment and settlement system.
5 The deposits in Banks are guaranteed by RBI. The deposits in NBFCs are not guaranteed.
6 Banks of the private sector provide foreign investment but not more than 74%. NBFC allows 100% foreign investment.
7 It is mandatory to maintain the reserve ratios like CRR (Cash Reserve Ratio) or SLR (Statutory Liquidity Ratio). NBFC is not required to maintain reserve ratio.
8 Banks frequently issue credit card to different types depending on the need of the customer. NBFCs do not create credits.
9 Banks provide transaction services to the customers like transfer of funds, giving overdraft facility, etc. NBFCs do not provide facilities like transfer of funds to the customer.

Banks provide various types of loans to customers based on their requirements. The types of loans can be categorized as Secured loans and Unsecured loans. If you are planning for bank loans, then have a look at Secured Vs Unsecured Loans to understand which one is a better option for you.

Knowing the difference between the secured and unsecured loan is an important step towards achieving financial literacy and can help you avail your desired loans. You need to make the right choice depending on your requirements, affordability and needs. Here’s a quick insight.

Secured Loan: These loans are provided for a fixed time period and are 'secured' by a physical asset that is owned by the business or individual and has an assessable value. This service is a common way of securing finance for your business. We can say that a secured loan has many advantages over an unsecured loan. Items such as stocks, bonds or any personal property can be used as collateral. The lender will hold the collateral until the loan is paid completely. In Secured loan the customer/client can get large amount of loan with less rate of interest. The only risk in Secured loan is, if the customer/client can’t repay the loan amount then the lender can sell the collateral and pay off the loan.

Unsecured Loan: An unsecured loan facility allows a borrower to borrow funds without keeping any asset or mortgage as collateral. This includes credit card, student educational loan, personal loan etc. Lender has chances of taking risk in this type of loan, because there is no advantage to recover in case of default and results in higher rate of interest. Here, the lender believes that the customer/client can repay the loan based on the five C’s of financial credit. The five C’s are:

The first C is ‘Character’- reflected by the applicant's credit score, employment history and reference.

The second C is ‘Capacity’- the applicant's debt-to-income ratio with reference to income and current bill.

The third C is ‘Capital’- the amount of money an applicant has in saving or investment accounts.

The fourth C is ‘Collateral’- a personal asset that can act as security for the loan.

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