Blog #EMI calculator

Banks are financial institutions that the country’s government permits to conduct activities such as accepting deposits, issuing funds in loans, providing cheque facilities and other utility functions. They are the monetary institution that regulates the financial system of the country. They serve as an arbitrator between borrowers and depositors. There are two types of banks - central bank, the apex monetary institution, and commercial banks-either public, private, or foreign. Banks have an IFSC code that helps to know which branch of a bank the individual’s account exists.

NBFC refers to a non-banking financial company registered under the companies act, 1956. They conduct financial services such as the issue of loans and advances, securities trading, wealth management. They offer services similar to a bank but do not hold a banking license. Three categories of NBFCs are asset companies, loan companies, and investment companies. Examples of loan companies in India are Muthoot Finance Ltd., Tata Capital Financial Services Ltd. Aditya Birla Ltd., etc.

Difference between Banks and NBFCs -

1. Incorporation :
   Banks are incorporated under the Banking Regulation Act, 1949, while NBFCs are included under the Companies Act, 1956.
   
   
2. Demand Deposits :
   NBFCs do not accept demand deposits, whereas banks accept demand deposits.
   
   
3. Foreign Investment :
   In NBFCs, foreign investments upto 100%, while foreign investments upto 74% are allowed in private banks.
   
   
4. Payment and Settlement System :
   Banks are an integral part of the payment and settlement system, but NBFCs are not a part of the system.
   
   
5. Reserve Ratio :
   The maintenance of reserve ratio is not necessary for NBFCS, though Banks must maintain reserve ratios.
   
   
6. Deposit Insurance Facility :
   NBFCs do not provide deposit insurance facility; however, banks offer deposit insurance facilities.
   
   
7. Creation of Credit :
   Banks create credit; on the contrary, NBFCs do not create credit.
   
   
8. Transaction services :
   Banks offer transaction services, although NBFCs do not give transaction services.
   
   
9. Self demand drafts :
   Banks can issue self demand drafts, but NBFCs cannot give self demand drafts.
   
   
10. Self cheques :
    Banks are permitted to draw self-cheques on their own; however, NBFCs cannot draw self cheques independently.

Reasons why banks are better than NBFCs -

1. Low-interest rate :
   Banks charge a lower rate of interest than the interest rates charged by the bank.
   
   
2. Over-draft facility :
   Banks offer the overdraft facility, which allows borrowers to pay interest in advance. It takes longer to repay loans if the tenure is long and the interest charged on it is more; by availing of the overdraft facility, a borrower can cut short the loan term, hence saving money. NBFCs do not provide an overdraft facility.
   
   
3. Documentation process :
   The documentation process of banks is strict and more organised than the documentation process of NBFCs.
   
   
4. Interest rate :
   The interest rate charged by banks is lesser than the interest rate charged by NBFCs. And in banks, the interest rates are quickly cut as per the MCLR.
   
   
5. Charges :
   The prepayment charges, foreclosure and late repayment charges are much higher in NBFCs than the penalties charged by the banks. NBFCs also have a higher processing fee and charge a late fee of 10% to 20% on the EMI.

Individuals and companies trust banks because of various facilities such as cash deposits, loans and advances, cheque facilities, overdraft facilities, etc. Banks now even provide mobile and online banking, making it convenient for users to access the various banking facilities. Banks have instilled the habit of saving in people. 

People can keep according to their needs as banks provide multiple accounts such as current account, savings account, fixed deposit account, recurring deposits, etc. They also offer additional liquidity in the form of loans and advances, which be beneficial in emergencies. There are various types of loan a borrower can avail of - personal loan, education loan, home loan, gold loan, vehicle loan. 

The government also recognizes banks to offer such facilities, which increases the trust factor. Many banks provide various online facilities such as an online loan EMI calculator to Calculate EMI before applying for a loan. The transparency factor also plays a crucial role. Public banks have to maintain transparency in their dealings which increases the trust in them from the citizens. The money deposited in banks is also much safer than keeping large amounts at home without security.

Also read this: Cash-Strapped Patients With Covid-19 Infection Can Consider Loans  

It is a good idea to take in mind all the factors that will affect the loan. And check whether or not they fit according to your needs and requirements. 

The factors are mentioned below: 

• Loan Amount:- There are a lot of banks that have different limits to the loan amount. Some only provide a certain loan for INR 15 lakhs, whereas some provide it till INR 25 lakhs. So the loan amount differs from bank to bank. But be sure only to take the amount that will be easier for you to repay. Some banks provide an extra amount than what you need, so don't fall for that and only take the amount you need. Because if you're unable to pay the loan amount along with the interest rate, then your asset will be seized, or it will negatively affect your credit score.
  
  
• Capacity:- Check your budget capacity along with your monthly or annual income to confirm that you'll be able to repay the amount along with the interest within the loan tenure. You can use tools like an EMI calculator to check whether or not you'll be able to pay the loan amount in instalments. The repayment amount is usually 60% of your monthly income. So check whether you'll be able to cover other expenses like child's education fee, utility bills, ration and miscellaneous expenses after deducting the EMI amount.
  
  
• Budget:- It is an essential factor to check your monthly income. And whether you'll be able to pay other expenses after deducting the EMI instalment. And you can't miss a single EMI instalment because you'll have to pay an additional fee if you do that. So it's advisable to plan your budget accordingly, deduct unnecessary expenses, and follow strict spending until your loan is completely paid off.
  
  
• Credit Score:- If you're applying for an unsecured loan, then you'll have to maintain your credit score. It is usually a range of numbers between 300-900 that describes your creditworthiness. The minimum credit score accepted is 750, but if your credit score is above 850, then you can get many benefits like discounts on interest rates, charges or fees. But if your credit score is low, then either the bank will reject your application, or they will charge you with a high-interest rate. So it's better to maintain your credit score.
  
  
• EMI:- There are a lot of EMI options available in the market. And each EMI option is designed for different individuals. The EMI is calculated according to your loan amount, interest rate and loan tenure. The EMI charged by the bank does not exceed 60% of your monthly income. But it usually differs from bank to bank. You can calculate the EMI you'll have to pay in advance using some online tools like a car loan EMI calculator. Some banks allow you to make a down payment, so you'll have to pay less loan amount by doing this. So if you pay a high amount of down payment, then the monthly EMI you'll pay will automatically decrease.
  
  
• Charges:- There are a lot of charges that are charged by the banks apart from the interest rate or loan amount. There are charges like foreclosure charges or application charges which can be avoided if you choose a suitable bank. Some banks don't charge these, whereas others do. So you'll have to do perfect research where you find out about the banks that will provide you with the loan you want at a low-interest rate and charges. There are certain charges that can also be avoided if you repay the loan amount on time along with interest.
  
  
• Terms and conditions:- Read all the terms and conditions stated by the bank carefully. Don't sign any papers until you're fully aware of the content that's on that paper. 

Conclusion: There are certain loan agencies that help you compare banks and choose the best one according to your need and requirement. They also help you throughout the loan application process; it's their job to make sure that you're familiar with all the terms and conditions before signing the document.

Also Read:- Banks featuring different type of loans