Various terms in loan transactions

As per 2017 estimates, the MSME sector consists of 51 million units and provides employment to over 117 million persons. The sector continues to be a key contributor to India's economy.

Eligibility: A number of factors like age, gross/net income, etc., are taken into consideration by a financial institution to determine whether an applicant is eligible for a loan product. The assessment made by the institution also determines the amount of loan that can be sanctioned to the applicant based on their eligibility. For example, a person earning more than Rs. 20 lakhs per annum applies for a home loan under PMAY (Pradhan Mantri Awas Yojana), and he is informed that he is not eligible for taking a loan under PMAY as it is meant for low-income groups and economically weaker sections of society. In this case, the eligibility is rejected in principle. In another instance, a person earning less than Rs. 6 lakhs per annum applies for a loan of Rs. 1 crore, and he is informed that while he is not eligible to take that high amount of loan, he can be sanctioned a particular amount that he is eligible for.

Term Loan: A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. Often, a businessman uses the cash from a term loan to purchase fixed assets such as equipment for the production process.

Interest Rate: It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).

EMI: Also known as equated monthly installments, EMIs are the monthly installments that are deducted from the borrower’s account every month towards repayment of the loan. The EMIs are calculated based on the amount, interest rate, and tenure of the loan.

EMI Calculator: An EMI calculator calculates the amount to be paid by the borrower as a monthly installment towards repayment of the loan. The amount is calculated considering the amount of loan, the interest rate at which the loan is taken, and the tenure of the loan.

Tenure: The duration for which the loan is given. For example, 20 years (240 months), 15 years (180 months) for a home loan, or 4 years (48 months) for construction finance. Financial institutions offer various options to the borrower for their loan products. The borrower can choose the tenure that suits them best.

Disbursal of Loan: Disbursal of a loan refers to the point at which the lender pays the amount of the loan over to the borrower. When a loan is disbursed, it means that the borrower has received the loan amount.

Mortgage: An asset whose conditional ownership is given to the lender as security towards the loan amount by the borrower is called a mortgage. At Capri Global Capital Limited, we accept clear title properties like land, plots, residential flats, office premises, etc., as mortgage for granting SME and construction loans. The possession of the mortgage, generally an immovable asset, is with the borrower, but the charge is created in favor of the lender. If a borrower fails to repay the loan amount, the mortgaged property is sold by the lender to recover the loan.

Hypothecation: The borrower has the actual possession of the asset for which the loan is taken. Generally, this is charged against loans for movable assets, like a car, bus, etc. (i.e., vehicle loans). Here, the assets (car, bus, etc.) remain with the borrower but are hypothecated to the bank for the loan granted. In case the borrower is unable to repay the loan amount, then the bank has the right to sell the asset (car, bus, etc.) and recover the total amount (with interest).

Real estate developers can also hypothecate the balance receivables on already sold units in their project as collateral security to the lender. For example, in his project, a developer has 100 units, of which 50 are sold and 50 are unsold at the time of taking the loan. While he can create a mortgage charge in favor of the lender on the unsold units, he can also hypothecate the balance amounts receivable from the buyers of the sold units to the lender.

Foreclosure of Loan: Loan foreclosure is the full repayment of the remaining loan amount in one single payment instead of paying in EMIs.