Glossary

    Credit Information Bureau (India) Limited (CIBIL) is an independent credit information agency in India. Cibil networks with all banks and lenders to collect and maintain records of individuals relating to their payment of loans and credit cards. Cibil offers two kinds of tools- a score for individuals called as CIBIL TransUnion Score and report named as CIBIL Information Report (CIR). Banks and lenders refer to these while evaluating and approving loan applications.

    Unsecured loan is a loan which is not backed by any sort of asset belonging to the borrower. The cost of this kind of borrowing or interest charged is higher than of secured loans. This is not surprising since lenders must take on additional risk of default on these loans. Common examples of unsecured loans are personal loan and credit card debt.

    Small loans refer to micro loans provided by self-help groups and microfinance institutions (MFIs). They are meant to boost entrepreneurial activities of the poor who do not have access to traditional banking system.

    Small loans are borrowed by poor entrepreneurs for small businesses like cattle rearing, diary, running kirana stores, etc. MFIs access borrowers through self help groups and field people. Interest charged on small loans is higher than that charged by banks due to high cost and risk of these loans.

    Loan amortization is the process of repaying a loan in equal installments (say EMIs). Each installment consists of an interest component and a principal component. As you progress with the periodic payments, the interest component shrinks and principal component makes the bigger chunk of the equal installments.

    Banks and NBFCs often categorize loans as secured loans and unsecured loans. Secured loans are those for which borrowers have to pledge some assets as security or collateral against their borrowing. The loan is thus secured against a financial asset or property, gold, etc which the lender can take possession of in case the borrower defaults on repayment and sell it to recover dues. Secured loans have lower interest rate than unsecured loans. Examples are home loan, car loan, loan against property, loan against gold, loan against shares.

    Title loan is the loan where borrowers must provide an asset as collateral. This term is commonly used in the US. Usually a car is provided as title and it is also called as car title loan.

    Title loans are considered risky assets by lenders and they charge high interest on them. Lenders do not require actual possession of the vehicle. The car provided as collateral should have clear title. Lenders typically lend up to half the resale value of the vehicle.

    These loans are more popular among those who do not have great credit background for the fact that lenders do not check credit details of borrowers. They only consider the value of the vehicle. Another reason why title loans have gained popularity is that they can get sanctioned in a few minutes' time.

    Payday loan is a type of very short term unsecured lending common in the US and other countries. It is often linked to the borrower's 'payday', which is the day on which employees collect their salary. Payday loans are very high interest loans and usually have to be repaid on the next payday. The lender might verify salary income before offering payday loans. They are known by different names such as cash advance, paycheck loan and cheque loan.

    Free loans are loans on which borrowers have to pay no interest. Such loans are usually given for charitable or social causes. For instance, Goa state government gives interest-free loans for approved higher education courses; Andhra Pradesh state government offers interest-free loans to women self-help groups, other state governments give seasonal interest-free loans to farmers.

    Bridge loans are taken to bridge a short break between periods when financing is needed and when large and permanent inflow is anticipated. Generally the loan is given after the bank is satisfied that arrangements have been made to raise funds or resources. Bridge loans are taken by firms to meet working capital requirements in the interim period of receiving proceeds from an equity issue, ECB, NCD, FDI or some other source. Only large banks provide such loans. They are also known as swing loans, caveat loan, interim financing or gap financing elsewhere.

    Bridge loan can also be used by individuals in the interim period of selling and buying a property. Few banks like SBI, Citibank and some HFCs offer bridge loans for property. Interest rate on bridge loans is higher than on usual home loans since they are short term loans (tenure up to 1 year) and due to additional costs involved.

    Home improvement loans are taken for renovating or sprucing up an existing house. The loan can be used for internal and external repairs and structural improvements but not for extension or increasing space of existing house. Home improvement loan is offered by all major banks and HFCs.

    Interest rate and tenure is similar to terms in home loan. Tax deduction can be claimed on up to Rs 30,000 a year towards interest repayment on home improvement loan. This deduction is subject to total cap of Rs 1.5 lakhs on interest of home loan (if taken) and home improvement loan.

    A loan shark is someone who lends at exorbitant interest rate and resorts to intimidation or violence for recovering it on time. Loan sharks use illegal terms and practices for lending.

    Consumer loans are those loans that are given for purchase of 'consumables'. In India these refer to consumer durables and household items like TV, refrigerator, computer etc and in some NBFCs even vehicles come under the category. They are mostly unsecured loans and interest rate is similar to personal loan interest rate. Though features of consumer loans are similar to personal loans there are banks and NBFCs offering both.


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