7 Financial Terms Every Loan Borrower Must Know

December 26, 2017by Team CapitaWorld0


As economy grows, people’s purchasing power increases. So does the prices of goods and services too. We all have dream of having own car, a big house and all other material stuff. Hence, it is natural to go for a loan to get what you desire for.

With the emergence of technology, availing loan for any personal or business has become relatively easier. Usually, we take loans without understanding all key terms from finance world and regret it later.

So, In order to get a better understanding of loans, we have compiled a list of seven important financial terms, which are as below:

1. Margin Money : It is the amount of money paid by the customer from his own pocket. Suppose, if you need a loan of Rs 50,000 and the bank is ready to finance 80% (Rs 40,000) of the loan amount, then you will have to pay remaining 20% (Rs 10,000). This Rs 10,000 is nothing but a margin money.

2. Electronic Clearing System (ECS) : Electronic Clearing System (ECS) & Standing Instructions (SI) are banking facilities by which EMI are paid to lenders.

Suppose, you have an account in HDFC Bank and have taken loan from HDFC Bank, then your funds (EMI amount) from HDFC Bank will transferred from your saving bank account to HDFC loan account on certain fixed date of every month.

But, if you have bank account in HDFC Bank and have taken loan from ICICI Bank, then on a given date of every month, from borrower’s HDFC Bank account money will be debited for paying EMI of ICICI loan.

3. Loan To Value (LTV) : The Loan to Value ( LTV ) is that part of loan, which the lender agrees to finance. Suppose Mr. ABC needs a car loan & lender is ready to offer maximum 60% of loan to value on it. It means lender will pay 60% of money of final car price. The rest 40% of money will be paid by customer from his own pocket.

4. Fixed Obligations to Income Ratio (FOIR) : FOIR i.e., Fixed Obligations to Income Ratio is a very popular parameter frequently used by lenders to determine loan eligibility of the customer.

For example: If a lender is allowing maximum 50% FOIR on certain loan then calculation could be like this,

The borrower’s income is Rs 30,000 & he does not have any other loan to pay. So, the lender will allow maximum of Rs 15,000 as EMI of the loan. Here, notice the word maximum. It can be less than that but not more than that.

5. Amortization Chart : When a loan borrower takes a loan, then he is supposed to repay in form of EMI. The EMI comprises of two components: Interest & Principal. An amortization chart shows the break-up of interest and principal for a loan with each EMI.

6. Balance Transfer Loans : Home Loan Balance Transfer (also known as Refinancing) allows loan borrower to shift his entire loan (principal outstanding) from one lender to another. It is done primarily get lower rate of interest.

7. Pre-EMI Interest : When a customer buys an under construction property, the loan amount is partially disbursed. The borrower is supposed to pay only interest part of the loan. These payments are termed as pre-EMI interest.

CapitaWorld is the first Interactive and Automated Financial Platform that connects various Fund Seekers, Fund Providers and Service Providers.

We offer all types of Retail Loans (Home Loan, Personal Loan, Gold Loan etc) & Corporate Loans (Term Loan, Working Capital Loan, Unsecured Business Loan etc).

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