New to Loans
Home Loans are a wonderful for those who want to own a home, but do not have the funds to finance such a huge acquisition. They are especially relevant today, when property prices have gone out of the reach of most middle class households.
Home (and other) loans work on the simple principle of ‘buy now, pay later’. The lender puts down the amount required, thus enabling the borrower to immediately take possession of the acquisition, on the agreement that he will pay back the loan amount, with interest, periodically over a length of time called the tenure.
Regulations demand that the home loan taker puts down a small percentage (usually 15%) of the property cost as down payment, while the loan provider will pump in the rest of the amount.
To take a housing loan, you need to fulfill certain eligibility criteria which vary from provider to provider. This is mostly related to your income and assets, but may also consider your past record at paying of loans, and your age.
Once the eligibility is successfully established, and the paperwork filled out, the loan is sanctioned in a relatively short time. The provider will issue the cheque for the sanctioned amount, which is handed over to the seller of the property, and possession taken. Generally there is a small loan processing fee involved.
Housing loans can be availed of for new projects as well as for resale properties.
Loans are ‘paid back’ in EMIs (Equated Monthly Installments) – fixed amounts which include the interest amount and part of the principal. EMI value depends on the interest rate, principal loan amount and tenure of the loan.
Housing loans are mortgage loans, in that in case of payment default, the provider has the legal right to acquire the property, and sell it to recover the default amount. Today there is the option of linking loans to an insurance policy, so that in case the loan taker dies, the policy will go towards paying off the rest of the installments, thus securing dependants against financial catastrophe.
Most providers offer fixed and floating interest rate options. A fixed rate locks in the interest rate over the entire tenure, and is therefore generally higher. Floating rates change periodically in tandem with the rate regulated by the governing body. Some providers offer the option of a fixed rate for the first few years which then automatically converts to floating. This helps tide over the initial years when money flow is very tight.
Presently there is a tax write-off available for repayment of housing loans up to a certain limit.
Prepayment options also exist. This is useful, especially when one suddenly comes into money, or ones income rises. In such situations it is a good thing to reduce ones debt obligations by paying off part of, or the entire, loan amount. However, be cautioned, because some loan providers have a prepayment penalty clause.
While housing loans are the most popular types of loans, auto loans, education loans, travel loans, business loans, personal loans etc. are also becoming commonplace.
One can also take a loan against existing residential or commercial property, which allowes you to access much needed funds, say, to fund some business plan or opportunity.
Business loans and personal loans generally do not require any collateral or security. Such loans generally involve smaller principal value, and higher interest. Personal loans may be for anything legal, including big-ticket gadgets, art acquisitions, shares, travel, whatever! Tenures are also much shorter.