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What Are Loans ? Its Advantages and Disadvantages.

It is common issue where people need money beyond their requirements at some point of time. Whether it’s needy of over expenses or genuine purpose, the matter for loan requirement comes in mind. So, that need can be fulfilled by taking a loan.

Some common reason why people are willing to take loan:

  • People spend money beyond their limits and go into shortfall when it comes to pay dues.
  • When anyone fell sick in the family and in order to meet the medical and treatment expenses of all sudden a loan can help to meet the requirement.
  • Buying a new or used vehicle: car, truck, bike etc need a little more money and that people can’t keep the cash ready all at once except in preplanned cases.
  • Some people pays their bills like mortgage, schooling, power, water, electricity, phone, credit card bills etc. by consolidating some or all together into just one loan. This is because they feel convenience of paying only one due instead of many.
  • It always seems extra renovations are required for house if it becomes somewhat old and also needs latest styles even in case of new build house. So that he/she may approach for loan.
  • Now a day’s people willing to make a trip short or long to have fun in the life and for relaxation. But, being costlier for vacation trip they are taking some finance to satisfy their needs.
  • Planning to start a new venture or business need capital which may not be enough with money they have and search for money source i.e., loan.

Loan from financial corporations includes rules and regulations and eligibility criteria, but not like with that of local money lender.

But, fraudulence and rate of interest with local money lenders are high. So, better approach licensed financial corporations even if you have some trouble in getting the loan.

Advantages and Disadvantages of taking Bank loans:

Bank loans can be used for multipurpose based on individual requirement like purchase of inventory and equipment and obtaining operating capital for business purpose. Loans are time-honored and helpful for small business and startup companies who really lookup for initial fund, anyway loans to these business are approved with collateral securities.


  • Loans are issued to individual or business on the eligibility criteria like value of business and also the previous loan track if he/she is having a loan history.
  • Banks don’t take ownership position in the business and also don’t involve in the decision taken for business development.
  • Once the loan payment is completed there won’t have any obligation to and bank shows more interest in providing subsequent loan if payments are done with discipline.
  • In case of loan taken for business, the interest part on loan can be shown as expenses in business. It is mostly applicable in the case of fixed interest rate loans as interest amount will be same throughout the tenure period and in case of variable interest loans. The expenses can be calculated manually in sheet and shown as expenses in business.


  • Business loan: In spite of having unsecured loan, major disadvantage is that they provide loan only on previous loan track or with the business balance sheet with last 3 years ITR returns and also with all supporting documents.
  • In case the business fails to repay all or part of loan or goes insolvency, precautions are taken to recover the losses with bidding the assets or with personal guarantees.
  • Interest rates for business loans are quite higher to that of interest received on “Fixed Deposit” in bank. Rate of interest ranges from 14%-24% per annum.
  • Can’t take another loans if the expenses or repayments are more than the revenue generated. This can be tracked with the AQB (Average Quarterly Balance) maintained in the banks and also eligible CIBIL score.

Some basic rules to follow when taking a loan:

  • Don’t borrow more than you can repay.
  • Keep tenure as short as possible. So, that you will be paying less interest amount.
  • Keep browsing and get in touch with sales managers to get less interest rate.
  • Ensure timely and regular repayment.
  • Don’t borrow for sake of investments and not properly planned expenses.
  • Take insurance if the loans are with Big-ticket.
  • Understand the fine print (rules and regulations) once loan is taken.
  • Keep informed to spouse, family about the loan taken.

There are 2 types of loans:

  • Secured loans: Home loans, Mortgage loans (LAP), Gold loans, Car loans etc
  • Unsecured loans : Personal loans, Business loans, Education loans etc



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