Finance Loan

In recent years, India has seen a significant surge in the demand for loans, reflecting the evolving economic landscape of the nation. According to the Reserve Bank of India (RBI), the total outstanding loans reached a staggering Rs 106.21 trillion (approximately USD 1.4 trillion) as of March 2023, marking a remarkable year-on-year growth of 9.5%. The surge can be attributed to both retail and corporate borrowers.
Experts expect that demand for finance loans in India will remain robust in the coming years. This demand stems from many factors, including expanding the country's middle class, the increased adoption of digital technologies, a favourable regulatory environment, and the penetration of new-age private finance companies offering customised finance loans. This article will explain what private finance loans mean, their types, eligibility criteria, steps to apply, and more.

Overview Of Private Finance Loans

Private finance loans are those offered by non-banking financial companies (NBFCs). These loans offer more flexible terms and have a smooth approval process. Private finance loans are preferred by those with average creditworthiness, decent income, or limited collateral to offer.

There are different types of financial loans that provide you with the flexibility to select the option that aligns with your specific needs. The two primary categories of online finance loans, which further branch out into various subtypes, are Secured and Unsecured loans.

Understanding the Different Types of Private Finance Loans

Online finance companies offer various loan products under secured and unsecured categories. Let's look at them in detail.

Unsecured Online Finance

1. Revolving Loan

A revolving loan is a flexible type of online finance that allows you, as the borrower, to access funds up to a specified limit, repay the borrowed amount, and then borrow again. It offers convenience and ongoing access to funds as per your requirements. For example, if you have a revolving loan with a limit of Rs 50,000, you can borrow Rs 20,000 for medical expenses. As you repay, you can borrow again for other needs, like home renovation or car repairs. The outstanding balance decreases with each repayment, and the credit becomes available for future use. The interest levied on them is on the amount you use, not the entire sanctioned amount. Credit cards and lines of credit are the two common examples of this online finance.

2. Top-up Loan

A top-up loan is an additional facility offered by a private finance company when you already have an existing loan. It allows you to borrow extra funds over and above your original loan amount. The key feature of a top-up loan is that you can use it for any purpose, such as home renovation, education expenses, or even debt consolidation.

3. Term Loans

It is a loan provided by a private finance company for a fixed period at a specified interest rate. As the borrower, you receive a lump sum upfront, which you repay in regular instalments over the loan term. Personal and business loans are the two most common examples of this finance loan.

4. Consumer Durable Loan 

A private finance company offers this loan specifically for purchasing consumer durables like electronics, appliances, furniture, etc. As a consumer, you can use this loan to buy your desired products without straining your finances. The best aspect is that you do not need solid creditworthiness for approval. Even a first-time finance loan applicant can qualify for this online finance.

5. Letter of Credit

A letter of credit (LC) is a financial instrument that guarantees payment to your supplier on your behalf. It assures the supplier that they will be paid once the agreed-upon terms and conditions are met. With an LC, you can mitigate non-payment risk and build trust with your suppliers.

Secured Online Finance

1. Working Capital Loan

A working capital loan is a financial tool that helps you manage your day-to-day business operations by providing funds for your short-term needs. It is specifically designed to cover inventory, payroll, and overhead costs. Your preferred private finance companies evaluate your company's underlying stocks and, based on its valuation, offer a maximum loan-to-value ratio of 75%.

2. Invoice Financing

This online finance loan is a solution that provides immediate cash flow by leveraging your unpaid invoices. As a business owner, you can sell your outstanding invoices to a private finance company at a discounted rate to receive a significant portion of the invoice value upfront. This helps you bridge the cash flow gap caused by delayed payments. Remember, it is your responsibility to ensure timely payment from your customer to prevent any inconvenience that may arise for the lender.

3. Vehicle Loan

A vehicle finance loan is a financing option that enables you to purchase a vehicle, such as a car or a two-wheeler. It provides the necessary funds to buy your desired vehicle while allowing you to repay the loan amount in instalments over a specified period. Under this, the online finance company pledges the financed vehicle until you repay the entire dues. The approval depends upon your repayment potential and the vehicle's resale value in the market.

4.  Home Loan

A home finance loan is a financial product that helps you purchase your dream home. This loan is further classified into plot loan, plot plus construction loan, under-construction loan, and home renovation loan. The funding value depends on the property's worth, its location, amenities, and the builder's reputation.

Features and Benefits of Private Finance Loan

These loans offer several features and benefits that may seem attractive to you as a borrower.

1. Consolidation of Debts

Managing multiple debts, especially those with high-interest rates can be challenging. However, finance loans provide a solution through debt consolidation. You can simplify your financial situation by consolidating your debts into a single loan with a fixed interest rate and a well-structured repayment plan. This approach not only reduces the risk of missed payments but also has the potential to lower your overall interest costs.

2. Tax Deductions: 

Certain private finance loans come with tax benefits that can work in your favour. For instance, if you have a home loan, you may be eligible for tax deductions under Sections 24 and 80C. Likewise, you can use funds for business purposes and classify them as expenses in your profit and loss statement. In that case, you can deduct the interest payments, reducing your taxable income.

3. Investment Opportunities

Finance loans open doors to investment and wealth building. As a business owner, a loan can fuel your expansion, fund new equipment, or launch a fresh product. 

Suppose you are the owner of a manufacturing unit. You require plant and machinery worth Rs 50 lakhs. If you purchase this expensive machinery using your revenue, you could face challenges managing day-to-day expenses or miss out on potentially lucrative opportunities. Exploring a business finance loan is the most suitable option in this scenario.

4. Realising Dreams and Goals

Perhaps the most significant benefit of finance loans is the ability to turn dreams into reality. Whether buying your dream home, pursuing higher education, or starting a business, finance loans can provide the necessary financial support to achieve your goals. By carefully assessing your needs and choosing the right finance loan, you can take meaningful steps towards realizing your aspirations.

5. Quick Access to Funds

In pressing financial needs, a finance loan can be a vital lifeline. Unlike traditional bank loans that typically entail lengthy approval procedures, these loans offer swift access to funds. Visit the website of your preferred private finance company, complete the application, upload the necessary documents, and their advanced technology promptly informs you of your loan eligibility.

6. Lower Interest Rate

Private finance loans offer the opportunity to obtain funds at more favourable interest rates when compared to credit cards or alternative borrowing methods. This can lead to substantial savings throughout the loan, making it a highly appealing choice for financing significant purchases.

7. Bridge Financial Gaps

Life is full of unexpected expenses, and finance loans can serve as a bridge to overcome financial gaps. Whether covering medical bills, home repairs, or emergency travel, an online finance loan can provide the necessary funds to address these unforeseen circumstances without disrupting your overall financial stability.

8. Improved Credit Score

Online finance loans are an excellent way to start if you have yet to begin your credit journey. Consider applying for a small loan of approximately Rs 50,000. Ensure timely repayment or, if feasible, pay off the loan before the required due date. Doing so will demonstrate responsible borrowing behaviour and witness a noticeable enhancement in your credit score.

Eligibility Criteria for Finance Loans

Private finance lenders use many factors to assess your eligibility. Here is a thorough explanation of each of them.

1. Credit Score

This three-digit score measures your debt management discipline. It reflects creditworthiness based on payment history, outstanding debts, and credit use. A higher score increases approval chances. But a poor score below 500 leads to denial or higher interest rates. You can boost this score by automating EMIs and keeping a portfolio of unsecured and secured debts.

2. Income and Employment Stability: 

Lenders decline loan applications when there is a lack of consistency in income. Additionally, they are reluctant to provide funding to those who frequently change jobs. To illustrate, consider the following scenario:

You run a business that specialises in selling woollen clothes. It predominantly thrives during the winter season. Here, your lender may deny funds due to income inconsistency and the risk of delayed payments. Furthermore, the employer's reputation also impacts loan approval. Individuals in government or MNC jobs have better approval rates than those working in startups.

3. Debt-to-Income Ratio: 

Debt-to-income indicates the proportion of your monthly income going towards debt repayment. Lenders generally prefer applicants with a ratio below 40.

Let's consider an example to understand this better. Suppose your net monthly income is Rs 80,000. Out of this amount, you pay Rs 50,000 for existing debt repayment, resulting in a debt-to-income ratio of 62.5. You pay Rs 6,000 monthly for life/health/car insurance premiums. The remaining Rs 24,000 is for groceries, utility bills, and other essentials. Given this, getting new debt and meeting the repayment obligations becomes challenging. The loan officer may deny your loan application as a result.

4. Loan Amount and Purpose

The lender may reject your application if you have several debts and apply for higher funding. The reason is that the loan amount is directly related to your debt-to-income ratio.

Private finance lenders usually do not need you to specify the purpose of applying for a loan. Yet, if you are applying for a business loan, make sure that you ensure the fund's use is solely for company usage. Otherwise, the lender may deny your application.

5. Loan Repayment Term

The loan repayment term refers to the duration you must repay the loan. It directly relates to finance loan approval. Remember, shorter tenure results in higher EMIs, which may not be suitable for you if you have a lower income. A longer tenure reduces monthly obligations but increases the interest payable. Choose a tenure that meets your financial capabilities and lender's requirements to ensure approval.

6. Age

Age impacts income stability, credit history, and the potential repayment period. Younger individuals may face challenges in getting a loan due to limited career exposure. They may also face challenges due to little credit history and income uncertainty.

Older borrowers may also encounter several obstacles in approval. These include nearing retirement, reliance on limited pension income, and shorter repayment tenures. Given this, the age eligibility with most lenders is 21-60 years. 

7. Collateral

When applying for a secured loan, collateral becomes crucial in determining eligibility. Lenders accept investment documents, real estate assets, gold, or vehicles, as collateral.

For investment collateral, ensure that the returns are not market-linked. Confirm if the investment's maturity occurs after the conclusion of the loan. On the other hand, resale value, insurance, and ownership documents are crucial for vehicle and property-related collaterals. Collateral can also assist in obtaining an unsecured loan if you fall short of the lender's requirements.

List of Documents Required for Private Finance Loan

Some of the most common documents that any online finance company may require are as follows:

Kindly note that the documentation requirements may vary depending on the specific private finance lender and the type of loan you are applying for. It is always advisable to check with the lender for the complete and up-to-date list of required documents.

Steps to Apply for a Private Finance Loan

Applying for a private finance loan can provide the financial support you need to meet your personal or business goals. To make the process smoother, follow these steps:

Step 1: Determine your finance loan requirements
To begin with, identify the purpose behind your loan application. Once you have a clear understanding of this, calculate the precise amount of money you need. For instance, if you seek a loan to fund your child's education, consider expenses such as hostel charges, accommodation costs, tuition fees, and other essential expenditures.

Step 2: Research private finance lenders
The market has numerous private finance lenders, but not all may suit your needs. Some lenders specialise in providing personal loans through their digital platforms, while others are well known for their expertise in mortgage funding. When selecting a lender, it is crucial to consider factors such as interest rates, the maximum loan amount they offer, and flexibility in repayment terms. It is advisable to read customer reviews and their eligibility criteria before moving forward with any lender.

Step 3: Gather the necessary documents
Arrange the required documents for your finance loan application. Some essential documents you will need include KYC proof, income-related documents, and a recent passport-size photograph.

Step 4: Fill out the finance loan application form
Acquire the loan application form from your private finance lender by visiting their office or downloading it from their website. Fill out the form meticulously, ensuring you provide accurate information regarding your personal and financial details. Be concise and avoid any errors or discrepancies in the form.

Step 5: Attach supporting documents
Attach all the necessary documents along with the loan application form. Ensure each paper is appropriately organised, legible, and signed, if required. Double-check the essential paperwork to avoid delays in the loan processing.

Step 6: Wait for finance loan approval
Once you have submitted your application, it is essential to remain patient as the private finance lender carefully reviews and assesses your submission. During this process, the lender will evaluate various factors, such as your credit score, past repayment history, and existing debts. These considerations will ultimately determine your eligibility for funding and the applicable interest rate.

Step 7: Negotiate finance loan terms
In the next step, the lender will prepare a provisional offer letter outlining the specified funding amount and repayment terms. It is crucial to thoroughly review this document and carefully assess the terms and conditions. If they do not align with your requirements, and provided you possess a strong credit track record, you should negotiate with your lender to amend the terms and conditions to suit your needs better.

Step 8: Accept the finance loan offer
Once satisfied with the loan offer, express your acceptance to the lender. They will guide you through the loan agreement signing process. Read the agreement thoroughly and seek clarification if needed. Sign the deal only when you are confident you understand and agree to all the terms.

Step 9: Receive the finance loan disbursal
Once you have signed the loan agreement, the private finance lender will initiate the loan disbursal process. The funds will be credited to your designated bank account following their procedure. To prevent incurring any penalties, it is essential to have a well-thought-out repayment plan in place. This will ensure timely repayments and help you manage the loan effectively.

Private Finance Loan EMI Calculator

Private finance companies these days deploy an EMI calculator on their website. This is an online tool that assists in determining how much funding you can afford. Let us look at an example to understand how this tool can be helpful.
Imagine you want to apply for an online finance loan of Rs 6,00,000. Based on your calculations, you estimate that the potential interest rate for your finance loan will be 12%. However, you are still determining the ideal repayment tenure. To explore different options, you decide to utilise the EMI calculator. Here is the table displaying the results of your calculations:

The table demonstrates that extending the repayment tenure can ease the burden on your finances in the short term. However, it is essential to note that a longer tenure will ultimately make your finance loan more expensive in the long run. Therefore, it is advisable to use this tool to balance affordability and effective budget management.

How to choose the best private loan company?

When searching for the best private finance near me on the internet, there are several important factors to consider.

• Reputation: Start by researching the reputation of a private loan company. Look for reviews and feedback from existing or past customers. Check if the lender has a good record of providing reliable financial services. Online forums can be valuable sources of information to gauge this aspect.
• Loan Processing Time: Consider the loan processing time of the private finance lender. If you need quick funds, choose a lender known for efficient and timely processing. Some lenders offer instant or same-day loan approvals, while others may take longer. Choose a lender who can disburse funds by minimising any unnecessary delays. 
• Transparency and Documentation: Transparency is crucial when dealing with private finance lenders. Ensure the lender provides concise information about the loan terms and conditions. This will help you understand the cost implications and make an informed decision. Also, check the documentation requirements for loan approval. Choose a private loan company with a streamlined and hassle-free process.
• Customisation: Consider if the private finance lender offers flexible loan options and customisation based on your needs. Some may provide features like part-payment, loan top-up, or loan restructuring. All these can be helpful in the long run. Choose a lender who can tailor the loan terms to accommodate any changes in your financial circumstances.
• Data Privacy: Verify its security measures before finalising an online finance company. This will help you protect your personal and financial information. Ensure your lender follows strict data privacy protocols and adheres to regulatory guidelines. This will help safeguard your sensitive information from unauthorised access or misuse.
• Customer Service: Review the quality of service provided by the private finance lender. Prompt and responsive customer support can be beneficial in case of any queries or concerns during the loan process. Look for lenders with accessible customer service channels like phone, email, or live chat to ensure a smooth and hassle-free experience.

Frequently asked questions