Many people believe that only poor or needy people apply for a loan from the bank? If you are one of those who believe in this philosophy we will make you think again. Our claim is based on the fact that people see one side of the story before making an opinion. They forget that there are always two sides of the coin. Therefore, you should know how to take out a loan from the bank even if you do not need it.
Even a dead clock shows the correct time twice a day.
Who knows when your life turns around and you are in dire need of money. Sometimes you may be looking for an investment. You also have a need for taking out a loan for home renovation. Let us start with this.
Top reasons for taking loan from bank
First of all, every loan is different. The reasons for taking a personal loan are different from reasons for taking a car loan. Due to this, we cannot consider them as common. In addition there are some interesting reasons for taking personal loans. Therefore, Here is the list of reasons why people take loans. These are just the most common loan types. In this article, you will also know about how to take out a loan from Bank.
Loan for Buying a Car
A four wheeler or car is not only a primary requirement but an aspirational product. Due to this, a large part of auto loans are taken for this. There are some interesting reasons for taking out a car loan. Additionally, we also have an article about reasons for car loan rejections.
Taking out loan for down payment
Yes, you read it right. Many people apply for personal loans to pay down payment of a home loan. However, this is not the right strategy. If you take multiple loans at the same time, your credit score may get affected.
Personal loan for marriage or any other important event
A personal loan as the name suggests is for personal needs. People take loans for weddings, birthday parties and for a lot more reasons.
Taking out loan for home renovation
If you already have a house then you would like to maintain it in good condition. If you do not have enough money then apply for a personal loan. You can use that money for renovation purposes.
Loan for credit card debt repayment
This is a bad strategy and can affect your credit score in the long run. But, sometimes taking out a loan for credit card payment is the last option.
Medical situation in the family
Medical situations are unlikely but at times they eat up all the savings. If you do not have health insurance then be ready to take out a loan to pay medical bills.
Loan for education or student loans
Education is very important for growth. Most governments do not prefer to invest in education and health sectors. There are corporations and politicians who are into the business of education and hospitals. As a result they consider public health infrastructure and education improvement as a threat to their business. Ultimately, students have to take an education loan to fund their studies.
Reconstruction of house
If you have a house built on your own land, you can take out a loan to rebuild it. Even if your ratings are poor, you can apply for a loan against property or loan against a house.
Personal loans to sponsor a vacation or a holiday
These are small loans that people take on their credit cards in most cases. You can also take out a loan from the bank for this reason. However they might consider this under the personal loan category.
Types of Loans
There are many reasons to apply for a bank loan. You might be looking for a car loan or want a home loan. The first thing is the requirement of a loan. Many people take loan for business and some take home loans. But you can narrow down all of them in two categories.
Secured loans
These types of loans are linked with some assets. An asset that banks consider as a collateral. For example: if you want a loan against gold it is a secured loan. Bank will keep your gold and provide money. In fact, the fastest loan approval happens in case of a gold loan. As soon as you pay the last EMI, they return your gold.
Taking out a home loan or a car loan also comes under the same category. You get the right to stay in the house or drive the car. But the ownership belongs to the bank until you pay back the entire amount. But there is also a good part about secured loans. Banks charge less interest rates on them. For example: the interest rates for home loans are low due to long tenure.
Unsecured loans
If your credit score is good then banks offer you personal loans without any collateral. Personal loans and credit cards are good examples of unsecured loans. In the case of a credit card, banks give you a credit limit to spend as per your convenience. You can use the money and pay later when the payment due date arrives. In case of a personal loan, you get loan money in one go. You need to pay the money back in easy monthly installments.
How to take loan from Bank
Here is a list of important things that impact your probability of taking out a loan from a bank. There are four important stages of the loan approval process. Most loan applications go through these stages.
1 – Application Stage
First of all, you connect with the bank. You fill up the form and share your requirement with the bank.
2 – Authentication
Banks want to give you loans. All they want to know is that you are a genuine person. Therefore, they do an address confirmation. The second part is the document verification. The bank statement, monthly salary payout must match the real records. During the verification process of loan approval, some banks also ask for a video verification. This is due to digitalization.
3 – Processing & Approval
This is the step where most important things happen. Processing of loan application. Before approving any kind of loan, banks check the following things.
Credit Score
Most developed countries in the world have a credit rating system. There are some famous credit rating agencies that work globally. These firms keep an eye on people and companies. This credit rating system creates a list of eligible candidates for loan. If you have a bad credit score then you need to work on it. You can improve credit score but it is a slow process. In this case, you can contact private lenders instead of banks. The only challenge with these financial institutions is high interest rates.
Payment History
Your payment history is an important factor when you want to take a loan from a bank. For example: have an unpaid or written off credit card on your credit report. Banks avoid giving you a new credit card. Similarly, if there is an unpaid loan or the payments of previous loans, banks reject the application. You can read our article on reasons for loan rejection. Therefore, if your payment history is good, the approval is fast.
Number of loans and Credit Cards
This is not a deal breaking thing but impacts. If you have loans above the permissible limit banks will reject. For example: 60 percent of your monthly income is going into EMI, banks will avoid adding a new one to the list. As a result, they will reject or hold a loan application. Therefore, you should never take unwanted loans.
4 – Loan Disbursement
This is the last step when you take a loan from the bank. Once your loan gets approved from the bank, they transfer money to the bank account.
Questions you may ask
If you are reading the FAQ, you should know how to take out a loan from a bank. We also want you to know the answers of these questions before you apply for a loan.
Is a bank loan an asset or liability?
The answer to this question is not simple. However, in accounting terms a bank loan comes under liabilities. But my angle is different. The reasons for taking a loan decides if the bank loan is asset or liability. For example: if you take out a loan for a car, it is mostly due to personal requirements. With time the value depreciates. On the other hand if you take out a home loan, you not only make an asset in the long term but also enjoy tax benefits in many countries. Above all the value of property keeps increasing. Due to this ultimately you make profit when you sell the house in most situations.
How do banks decide loan eligibility?
First of all, a bank checklist for approving a loan includes a credit score check. Secondly, banks check your income and capacity to return the loan. Consistent income is also an important criteria. You can read our article on how banks approve a loan for more details.
How to take out a loan with a bad credit score?
It is possible to have a low credit score. It happens with all of us due to setbacks in life. Especially in the private sector with no job security it is possible to face a financial crisis. But once the credit score goes low, banks avoid giving loans. Therefore, the best thing is to avoid any kind of loan if possible. You can minimize your expenses. But if you need money on an urgent basis, you can take a secured loan. You can take a loan from a bank with collateral. Loan against property is an example of a secured loan. You can also contact Gold loan companies. The interest rates are a bit higher but the chances of loan approval are better.
How to pay home loan EMI?
When you take a loan from a bank, EMI is the obvious liability. There are many ways to make payment online. In most cases banks debit the EMI directly from your bank account. Your account needs to be linked with the loan account. Due to technology it is the most convenient method of making home loan payments. You can also use the same for other loans and credit card EMIs.