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Mortgage and Loans
Mortgage and Loans
Advancing loan is one of the major activities of a Bank. Bank accept deposit from the public for safe keeping and pay interest to them, money thus obtained is further lent to earn interest on this money. In a way, the banks act as intermediary between the people having surplus units and those requiring funds for investment. Banks lend money for every permissible activity and in various forms as per the requirement of the customer. Loans given to the borrower are subject to certain preconditions i.e. the borrower gets the loan against certain securities.
Examples of the securities against which the banks lend are as under
- Commodities
- Debts
- Consumer durable goods
- Real Estate
- Financial Instrument
- Automobiles
- Document of title
Type of Business Loans
Followings are the different type of business loans
- Secured Loans: A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
- Unsecured Loans: Unsecured loans are monetary loans that are not secured against the borrower’s assets. These may be available from financial institutions under many different guises or marketing packages:
- credit card debt
- personal loans
- bank overdrafts
- credit facilities or lines of credit
- corporate bonds (may be secured or unsecured)
The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.
Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender’s options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower’s unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower’s assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.
3. Clean Loan: Loan granted by the bank without accepting any security is called a clean loan. But the banks will safeguard themselves by checking the repaying capacity based on the salary certificate.
4. Corporate Term Loans: Corporate term loan can support a company in funding ongoing business expansion, repaying high cost debt, technology up gradation, R&D expenditure, leveraging specific cash streams that accrue in a company, implementing early retirements schemes and supplementing working capital.
The corporate term loans issued by a bank generally available for tenors from three to five years, synchronized with the borrower’s specific needs. Corporate term loans may carry fixed or floating rates, as the exact requirement of the becomes and the risk context. Again, these rates will be linked to the bank’s prime lending rate. Corporate term loans can have a short or periodic repayment schedule, as per the requirement of the borrower. The repayment mode may be linked to the cash accruals of the company.
5. Retails Loans: A retail loan is similar to a mortgage loan acquired to buy a real estate property. The primary difference is that mortgage loan secures a residence, whereas a retail loan secures a commercial retail property. Banks and private investors can supply funding for a retail location, such as a stand-alone retail store or a strip mall. Various details play a role in the approval process, and lenders use numerous factors to determine the interest rate on a commercial retail loan.
6. Working Capital Finance: Loans advanced by the banks to meet the short-term fund requirements that arise within an organization to meet the there day-to-day operational cycle, which assists the company in financing inventories, funding production managing internal cash flows, providing cash to support business expansion and management.
7. Bill Discounting: Bill discounting is a major activity with some of the smaller banks. Under this type of lending, bank takes the bill drawn by borrower on his customer and pay him immediately deducting some amount as discount/commission
8. Project Finance Loans: Project finance loans are long term loans, with tenors generally from 5 to 10 years. Maturity periods and repayment modes are structured in accordance with specific aspects of the project (in the industry) and factoring in a time frame for the venture to generate fair return from the project.
9. Cash Credit Account: This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank.
Overdraft: The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it.
