Banking Awareness

Loans, Advances
and its Types
 Banking Awareness
Loans, Advances and its Types

Loans, Advances and its Types

A Loan is a sum of money that an individual or company borrows from a lender. A loan is

when you receive money from a friend, bank, or financial institution in exchange for future

repayment of the principal and interest. A loan is essentially an amount borrowed for a fixed

period.

Characteristics of Loan:

1. It is a short-term source of finance.

2. Time to maturity describes the length of the loan contract.

3. Payments may be required at the end of the contract or at set intervals, usually on a

monthly or semi-annual basis.

4. Interest is the cost of borrowing money.

5. Assets pledged as security against loan loss are known as collateral.

Ways and Means Advances: The Reserve Bank of India (RBI) gives temporary loan

facilities to the central and state governments. This loan facility is called Ways and Means

Advances.

Types of Loan:

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 Banking Awareness
Loans, Advances and its Types

Secured Loan:

When the borrower pledges some asset as collateral for the loan which then becomes a

secured debt is called a secured Loan.

Examples:

1. Car loan

2. Vehicle Loans

3. Gold Loan

4. Home Loan

5. Loan against Property

Unsecured Loan:

An Unsecured Loan means the loan is approved without producing Collateral. The

Unsecured Loan is a reverse of Secured Loans.

Examples:

1. Credit Cards

2. Student Loans

3. Personal Loan

4. Unsecured Bonds

5. Bank Overdrafts

Term Loans:

A Term loan is one of the types of loans with a fixed duration for repayment. A borrower can

opt for a fixed or floating rate of interest for repayment of the advance.

Types:

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 Banking Awareness
Loans, Advances and its Types

1. Short term

2. Medium-term

3. Long term

Revolving Loan:

Once the outstanding amount is paid off, the borrower can use it over and over again which

is called a Revolving Loan.

Example: Credit cards

Soft Loans:

A soft loan is a type of loan which bears no interest or with lower rate of interest. This type

is also called Concessional Loan. These Loans have extended grace periods or interest

holidays for repayment.

Hard Loan:

Hard Loan is a unique type of loan in which funds are secured by real property instead of

the borrower's creditworthiness. It is a risky asset-based loan.

Reverse Mortgage Scheme:

A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money

using their home as security for the loan. This type of loan is especially for senior ages of

62 and older. This is the opposite of a Plain Home Loan.

Introduced in: 2008 by the Government of India

The loan under reverse mortgage shall not be granted for a period exceeding twenty years

from the date of signing the agreement by the reverse mortgagor and the approved lending

institution. Reverse mortgage loans typically must be repaid either when you move out of

the home or when you die.

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 Banking Awareness
Loans, Advances and its Types

Advances:

Advances are defined as loans that financial institutions extend to other companies or

individuals to meet their immediate financial needs. An advance is essentially a credit

facility that businesses provide to borrowers, as opposed to a full-fledged loan.

Different types of bank advances:

There are numerous types of bank advances. Here are some of the most popular ones:

 Cash Credit: Cash credit refers to the type of advance wherein customers can

borrow funds by putting forth the security of tangible assets. Every bank has a “cash

credit limit,” which determines the limit of funds that any customer wishing to get a

loan can acquire.

 Short-Term Loans: As the name suggests, banks offer funds to customers for a short

time. The entire amount of the loan is sanctioned and provided to the customer at

once and not in periodic instalments.

 Bill Purchases: Bill purchases are a variant of advances offered by banks wherein

the customers pledge their bills to the bank and receive a set amount in return.

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