Loan - All you need to know about | Study Notes

The beginning is the most important part of the work. -Plato

 Loans – all you need to know about

Loan - In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A debt provided which you need to payback with the cost i.e., interest.

Types of Loan – Broadly we classify it into two parts – 1. Demand Loan  2. Term Loan

1.       Demand Loan – CC & OD

2.       Term Loan – All the other categories

Cash Credit – A cash credit is a drawing account against credit limit granted by the Bank.

Overdraft (OD) – it is the extra drawing limit from the account apart from the balance present in your account.

Both CC & OD have almost similar working but the difference arises at the point that for CC you need to open a new account & OD facility is provided on the same CA or SA. Further CC is provided on the hypothecation of stocks such as Raw Material, Work in progress, finished goods etc.

Term Loans – Vehicle loan, Home loan, Personal Loan, Agriculture loan, education loan etc. Here the bank credit your account once & you can withdraw the complete amount as & when the account is credited.

Terms Related to loans –

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           Hypothecation - It is used when you (borrower) have the actual possession of the asset, for which you have taken the loan. Generally, this is charged against loans for movable assets, like car, bus, etc. (i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you are hypothecated to the bank for the loan granted.

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           Mortgages - It is used when you (borrower) have the actual possession of the assets, for which you are granted loan (e.g., house loan), or against which you are granted loan (e.g., house mortgaged). Mortgages are generally those assets, which are permanently attached with Earth surface, like house, land, factory etc.

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           Pledge - It is used when the bank (or, lender, known as pledge) takes actual possession of the securities, such as goods, certificates, gold, etc, (you provide it to bank to avail loan) which are generally movable in nature. Bank keeps the securities with itself, and provide loan to you.
Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after you repay all the debts (i.e., loan) to the bank.

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      Lien - It is almost similar to Pledge, except that in case of lien, the lender can only detain the asset/goods until the borrower repays the loan, but have no right to sell the asset, unless explicitly declared in the lien contract. (For a pledge, the lender can sell the asset, if the borrower is unable to pay the loan)

Eligibility Criteria – Its different for different kind loans. But the Only Thing which one should keep in mind while applying & approval of loans is the credit rating of the loanee.  (The Cibil Score)