In finance, “loan” is a very popular and common term. In layman’s terms, a loan is an act of borrowing funds from a lender with the intention of repaying the funds plus an agreed-upon interest amount. Depending on the requirement, banks offer different loan types, such as personal loans, car loans, home loans, education loans, etc. This article will teach you about the various types of loans and loan processing steps in banks.
Types of loan
Here we will discuss various types of loans and when to apply for those.
- Personal Loan: As per the name, a personal loan can be utilized or applied for various reasons. Depending on your requirement, you will need to provide documents to the lenders and choose the loan amount, duration, etc. Personal loans can be applied for vacations, weddings, unexpected or emergency situations, settling credit card debt, etc. Applying for a personal loan is much easier these days. If you meet the bank’s criteria, within a few days the loan process can be completed by the bank.
- Education Loan: Education or student loans are meant to cover higher education tuition fees, hostel fees, etc. It can also be an option when opting for colleges in foreign countries. This loan can’t be utilized for personal use or any job oriented courses. Here the student will have a moratorium period of 12 months once they complete the course and 6 months once getting a job (whichever is earlier).
- Home loan: As the name suggests, this loan can be applied when you need financial support to buy a home. The duration of this type of loan is quite long (25-30 years). A home loan can also be utilized for home renovation, extension, land purchase, etc.
- Gold Loan: One can apply for a gold loan by pledging gold jewelry, gold coins, or bars. The loan amount will depend on the gold value pledged. This is one of the ways to raise money for urgent needs, business expansion, medical costs, etc.
- Car/Bike Loan: Banks offer various loan offers while purchasing your dream bike or car. It’s easy to apply through the car dealer while purchasing the car/bike. Since this loan falls under secured loans, if you fail to pay the EMIs lender can take the vehicle and recover the outstanding amount.
- Business loan: This helps business owners to grow their businesses, purchase more equipment, expand manufacturing plants, hire more employees, etc. Small businesses are mostly opting for business loans in order to grow, settle other debts, market, expansion, etc. The eligibility criteria can vary from lender to lender.
Prerequisite to getting a loan
Borrowers will have to go through mandatory documentation as a part of the loan application process. The documents required for a loan can differ based on the loan type and the lender. Let’s discuss a few of them below
- Proof of identity: Aadhaar card/Passport/Voter ID/Driving Licence/Govt ID etc.
- Proof of residence: Aadhaar card/Voter ID/Electricity Bill/Ration card etc.
- Proof of Income: PaySlips (for salaried persons)/bank statements/ITR etc.
- PAN Card: Property/asset documents in case of any collateral engaged with the loan.
These are a few important documents required for loan processing. Submitting correct and complete documents is required for a successful loan application.
Please note that the documentation process is different for all banks and loan types. Contact the bank directly for the updated and correct loan procedure for a smooth loan application process.
Loan Processing Steps
Now we’ll go over the loan processing process in the bank step by step.
- Choose your loan type: Firstly, you will have to decide on the loan type before applying for it. Based on your requirement, you should apply for the correct loan type for a better chance of loan approval.
- Check your Credit score: Credit Score plays a huge role in the loan approval process. A credit score of 750 or above is considered a good credit score and has a high chance of loan approval and better interest rate options. You can check our article on Credit Score to learn more about it.
- Select the correct lender: Before selecting the bank or financial institutions, it is recommended to compare interest rates and all other T&C. This will help you in making decisions as different banks offer different interest rates and they have different sets of terms related to the loan application/account. You can contact any nearest branch, and check their official websites for the same.
- Start with the loan application: Once you are done with all your research, you can start the loan application process with the bank either through their websites (online) or bank (offline).
Be careful of any loan offers provided by an unknown or untrusted source, as this can result in any kind of scam. It is recommended to go through the official channel for the loan process.
Other alternatives to credit
Now that we have discussed the loan types, and loan application process, we also need to acknowledge the fact that this process can be lengthy and may consist of multiple attempts and document submissions. Due to this, a loan is not preferable to people in the occasion of any emergency or medical needs.
In this case, people often opt for their friends and family’s help, or credit cards, or credit providing apps.
- Credit card: Credit cards are financial instruments, which can be used to purchase any item or service by utilizing the credit provided by the financial institution. Credit cards can be used to pay for any emergency needs, or medical bills, and the borrower can repay the amount later. Most credit card companies also provide the option to convert high value transactions into EMI. Credit cards have higher interest rates than all other credit options, but it’s a good option in any emergency situation. Read our blog on Credit cards to know more about the uses and application process.
- Credit app: Now-a-day, we have several apps available which allow people to apply for a credit limit by providing the required documents. Once the user’s application is approved and a credit limit is provided, the user can use the amount at any time. This helps people with any emergency cash need, as they can withdraw the amount or use it on the merchant’s website directly. They can repay the same with or an extra fee within the company defined time frame.
Please check the company background, policy, and registration with RBI or other necessary government entities before providing any personal information or starting the loan process.
FAQ related to Loan Processing
Failure in paying EMI on time or missing EMI can lead to a negative impact on your Credit score, and heavy penalties by the lender. Hence it’s recommended to pay the EMI on or before the payment date every month.
Below are the documents that are required for an Education loan (it can vary from bank to bank, please check with the bank for an updated list of requirements)
Proof of identity
Proof of address
Academic records (10th, 12th, Graduation Marks Card/pass certification)
Entrance Examination result (if applicable)
Proof of admission/loan letter from the institute
Parent’s income statement
Below are the common documents required while applying for a Personal loan it can vary from bank to bank, please check with the bank for an updated list of requirements)
Proof of identity
Proof of address
Payslips (Salaried), Bank statements, ITR