Bank Loan

What is Bank Loan?

A Bank Loan is a sum of money borrowed from a bank or financial institution, which must be repaid over time along with interest. It is a common form of credit provided to individuals, businesses, or organizations to meet financial needs such as purchasing assets, expanding operations, or covering expenses.

Key Features

1. Principal: The original amount borrowed.
2. Interest: The cost of borrowing, typically expressed as an annual percentage rate (APR).
3. Tenure: The time period over which the loan is to be repaid.
4. Repayment Schedule: Can be in the form of monthly installments (EMIs), bullet payments, or customized plans.

Types of Bank Loans

1. Personal Loan: Unsecured loan for personal expenses.
2. Home Loan: For purchasing or constructing residential property.
3. Auto Loan: For buying vehicles.
4. Business Loan: For funding business needs like working capital or expansion.
5. Education Loan: To finance academic courses in India or abroad.
6. Gold Loan: Secured against gold ornaments.
7. Loan Against Property (LAP): Secured by mortgaging property.

Eligibility and Documentation

Loan approval depends on factors like credit score, income level, repayment capacity, and existing liabilities. Documents typically include identity proof, address proof, income proof, and bank statements.

Example

An individual takes a personal loan of ₹5 lakh from a bank at 11% interest for 3 years. The bank sets a monthly EMI, which includes both principal and interest, to be paid over 36 months.

Indian Context

In India, bank loans are regulated by the Reserve Bank of India (RBI). Banks use the Marginal Cost of Funds based Lending Rate (MCLR) or External Benchmark Lending Rate (EBLR) to determine loan interest rates. Borrowers are also entitled to prepayment and foreclosure options, subject to terms and conditions.