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Bank Loans

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Bank Loans are an excellent means of financing high-value items like car, home, property, medical expenses or meeting any unforeseen expenses. Certain bank loans can be used to purchase only the items for which they are designed, while others can be used for any purpose. You have to choose the type of the loan carefully because the interest rates for the different types of loans differ. Certain types of loans also provide tax benefits.

The most common types of bank loans are: car loans, home loans, educational loans, business loans and personal loans. Car loans are used to purchase a new or secondhand car. Home loans or mortgages are meant to provide finance to buy your dream home. If you want to go abroad for advanced studies, apply for an educational loan. Expand your small business with the help of business loans. Personal loans can be used for any purpose like meeting medical expenses, going on holidays or renovating your existing home. Of these, mortgages and business loans let you avail of tax benefits.

When you take a bank loan, you are charged interest on it. This is the money you have to pay to the bank for letting you use their money. This interest rate can fluctuate depending on the economic conditions. As a result, your interest payments can also vary. If the interest rate goes up, you pay more and vice versa. This type of loan is called floating-interest rate loan. But you can also avail of fixed-interest rate loan, which locks your interest rate at rate available at the time of approving the loan. Hence your interest rate will remain fixed throughout the tenure of the loan. This protects you if the interest rate rises.

Certain types of bank loans need collateral before approval. These types of loans are called secured loans. The collateral acts as a security to the bank if you default on the payment. Car loans or mortgages fall under this category as your car or the property becomes the collateral to the loan. These types of loans carry lower rate of interest because your lender has the first claim over your asset in case of default. This reduces their exposure to risk, and hence they charge you lower interest and let you borrow more. On the other hand, personal loan does not need any security. So you have to pay higher interest on it, since the lender is taking a big risk by lending the money and consequently the amount you can borrow is smaller.

Once your bank loan is approved, you will be given a repayment schedule. This contains the amount you should repay to the bank each month, called equated monthly installment (EMI). It is calculated on the basis of your principle, interest rate charged and tenure of the loan. EMI contains two components: principle and interest. In the beginning, interest portion exceeds the principle. But this situation changes as you keep on paying subsequent EMIs.

Before taking any bank loan, shop around to get the best interest rate. Find out any penalties and charges levied as this will make the loan more expensive. If you are in doubt, consult a financial advisor for help.