What Is Loan? Know The Definition and Meaning of Loan

Read on to know about loans, the different types of loans offered, EMIs, and the factors that influence EMIs.
What Is Loan? Know The Definition and Meaning of Loan
5 min read
17 Mar 2023

Making large expenses from savings may not always be possible. Wedding expenses, funding your child’s higher education or even renovating your home, are some such large expenses that you may not be able to cover with your savings. To ease the financial stress of such heavy expenses, one can always take out a loan. Let us understand the meaning of loans and how they work.

What is a loan?

A loan is an arrangement between a lender and a borrower in which the borrower agrees to pay back the borrowed sum in equated monthly instalments (EMIs) with an additional interest within a pre-set tenure. It is a short-term infusion of cash that must be repaid later, usually the principal and the interest payable. Know more about our personal loan

Understanding loan with an example

Borrower took a personal loan of Rs. 1,00,000 at 11% interest for 3 years, his total repayment will be of 1,17,859. The principal is Rs. 1,00,000, and interest amounts to Rs. 17,859.

What are the uses of loan?

Personal loans are versatile financial tools. They address immediate needs like medical emergencies, home repairs, and streamlining payments. They support major life events like weddings, offering timely funds. Personal loans enable education pursuits, covering tuition and materials. Moreover, they aid in improving credit scores when repaid responsibly. However, their convenience should be balanced with interest rates and repayment terms. Wisely allocate personal loans for essential, productive, or transformative purposes that align with financial goals, avoiding unnecessary debt and ensuring a stable financial footing.

What are the factors affecting loan eligibility?

Personal loan eligibility is determined by factors like credit score, income, employment stability, and existing debt. Lenders assess the borrower's ability to repay the loan. A higher credit score enhances eligibility, showcasing responsible credit behaviour. A stable income and employment history indicate repayment capacity. Lenders might consider the debt-to-income ratio to ensure the borrower's financial stability. Age, citizenship, and location can also impact eligibility. Meeting these criteria increases the likelihood of loan approval. However, borrowers should evaluate their financial situation, borrow responsibly, and consider the loan's purpose, terms, and interest rates before applying.

How to improve your loan eligibility?

Check credit score: Maintain a good credit score for higher eligibility.

Clear outstanding debts: Reduce existing debts to improve your debt-to-income ratio.

Stable employment: Lenders prefer stable employment; avoid frequent job changes.

Income proof: Provide accurate and updated income documents.

Lower credit utilisation: Aim for lower credit card balances compared to the credit limit.

Timely bill payments: Ensure timely payment of bills to establish reliability.

What is the loan process?

The loan process typically involves several steps. Firstly, individuals must submit a loan application to a lender, either through a physical form or an online platform. This application includes personal and financial information, such as income, credit history, and purpose of the loan. The lender then assesses the applicant's creditworthiness, considering factors like credit score and debt-to-income ratio. Based on this evaluation, the lender approves or denies the loan.

What Is a loan EMI?

EMI stands for equated monthly instalments. It is a fixed amount of money that borrowers need to pay to the lender every month, to repay their loan. EMIs help borrowers to repay their debt in a systematic and structured manner over a specific loan period.

How is an EMI calculated?

You can compute your monthly payments using a mathematical formula as follows:

E = P*r*(1+r) ^n/((1+r)^n-1) where,

What are the factors that influence your EMI payments?

The following are the factors that can influence your EMI:

Principal borrowed: This is the total loan amount that the borrower has taken out.
Loan interest rate: This is the interest rate applied to the amount borrowed.
Tenure: The length of the loan, or the tenure, is determined by the borrower and the lender.

What are the types of loans offered by Bajaj Finance?

Bajaj Finance offers a diverse range of unsecured loans including personal loan, Insta Personal Loan, gold loan, business loan, doctor loan, and more. We also have a portfolio of automotive loans such as two-wheeler finance and used car finance.
Personal loan is one of the most popular products offered by Bajaj Finance. These loans are unsecured, which means customers do not need to pledge any collateral or need a guarantor to avail of one. Additionally, our personal loans come with no restriction on end-usage. Borrowers can get Bajaj Finserv Personal Loan of up to Rs. 40 lakh with minimal paperwork and quick approval. These loans have a flexible repayment term ranging from 6 months to 96 months. Bajaj Finance offers personal loans with 3 unique variants to its customers, including:

  • Term loan: A term loan, is a regular personal loan, where you borrow an amount for a fixed period and repay it with fixed EMIs every month.
    Know more about term loans
  • Flexi Term Loan: With a Flexi Term Loan, you can borrow the amount from a sanctioned loan limit as many times as you need. Additionally, you pay interest only on the amount that you have utilised, and not the entire sanctioned limit.
    Know more about our Flexi Term Loan
  • Flexi Hybrid Loan: This variant of a personal loan functions just like the Flexi Term Loan. The only distinction is that your EMI will be only of the interest amount during the initial tenure.

How to calculate personal loan EMIs online?

You can use the personal loan EMI calculator to compute your EMI payments. It is an online tool that helps you figure out your monthly payments without having to do the complicated calculations manually. By using this calculator, you can plan your finances effectively in advance.
Use Bajaj Finserv Personal Loan EMI Calculator to compute your EMIs instantly without any hassle

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Frequently asked questions

What are the common classifications of loans?

Below are the few common loan classifications of loans:

Secured Loans: Backed by collateral, like home or car loans.

Unsecured Loans: No collateral required, such as personal loans.

Fixed-Rate Loans: Interest remains constant.

Variable-Rate Loans: Interest fluctuates based on market changes.

What is loan payment?

Loan payment refers to the periodic instalment made by a borrower to a lender to repay borrowed funds. Payments typically include both principal and interest. The frequency and duration depend on the loan agreement. Timely payments are crucial to fulfilling the financial obligation and maintaining good credit.

How to reduce your total loan cost?

Below are the few tips to reduce your total loan cost:

Make additional payments: Paying more than the minimum reduces the principal.

Refinance at lower rates: Explore refinancing options for lower interest rates.

Shorten loan term: Opt for a shorter repayment period to save on interest.

Avoid late payments: Timely payments prevent additional fees and interest.

What is loan amortisation?

Loan amortisation is the gradual repayment of a loan through scheduled, fixed payments over time. Each payment covers both principal and interest, with early payments primarily servicing interest. Over the loan term, the ratio shifts, reducing interest and increasing principal repayment until the debt is fully paid off.

What is the difference between loan term and loan amortisation?

The loan term is the overall duration agreed upon for repaying a loan. Loan amortisation, on the other hand, refers to the systematic breakdown of payments over the term, delineating how much goes toward principal and interest at each interval. The amortisation process defines the repayment structure within the specified term.

Show More Show Less