16 AUGUST, 2019

It's common knowledge that when you avail a loan you're obligated to the lender until you repay the amount. But are you familiar with the nuances of home loans? Worried if you'll understand the jargons of the financial world? We put an end to your queries through this simple guide that explains the basics of loans.

The Two Major Types of Loans: Secured and Unsecured

When you take a secured loan, usually taken for a home or a car, you have to provide security to avail it. On the other hand, in an unsecured loan you need not give details for any security.

Loan Tenure

The period of time for which you get the loan is called, ‘Tenure'. The tenure is primarily dependent on your age

  • Age — If you're young then you can avail loans for a longer tenure. The older you are, the shorter will be the tenure.

EMI — Equated Monthly Instalments
When you avail a loan, you repay the amount in the form of recurring payments called EMIs. Home Loan EMIs are divided into two parts:

  • Principal repayment — A portion of the amount you pay as EMI is for repaying the face value of the sum you have availed as a loan.
  • Interest — The second portion of your EMI is for the interest the lender charges you for the loan. It is usually a percentage which is based on the total amount you have borrowed from the bank.

You must understand that though the EMI remains the same throughout your tenure, the percentage of Principal Repayment and Interest that comprise the EMI keeps varying.

Loan Amortisation

Every time you make a payment as EMI, there is a reduction in the total amount you have borrowed from the lender. This process of making recurring payments to reduce the principal value is called amortisation.

Restrictions on the Use of the Principal

Certain types of loans put a restriction on the usage of the principal amount. For instance, if you take a home loan then the amount can only be used to buy a house. Whereas, if you take a personal loan there are no restrictions on the way you use the money.

Repayment Options

For most home loans, there is a special schedule according to which you must repay the amount. There are three factors that you must be aware of:

  • Default: If you make irregular payments then your credit history is affected severely. Similarly, if you're unable to pay back the loan the lender can legally take control of your property.
  • EMI Changes: If you avail floating loans then your EMI can change, subject to the interest rates prevailing in the market.

Guarantor
When you avail a loan, you must provide a guarantor. If you're unable to repay the loan, it becomes the guarantor's responsibility to pay it back.
Now that you have acquired the basic knowledge about home loans, make an informed choice before you make your Home-Sweet-Home dream a reality.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.