Financing Alternatives – Loans & Advances

Financing Alternatives – Definition

• Refers to methods for raising capital for business or personal needs
• Choice depends on cost, risk, collateral, tenure, and borrower creditworthiness

Loans and Advances – Overview

• Provided by banks/financial institutions
• Main types covered: Overdraft, Outport Cheque Purchased, Fixed/Term Loan, Housing Loan, Personal Loan

Overdraft

• Allows withdrawals beyond account balance up to an approved credit limit
• Key traits: flexible access, unsecured (collateral may be requested), repayable on demand
• Costs: variable interest on utilised amount, assorted fees (annual, per‐transaction)
• Process: application → approval & limit set → usage within limit → periodic repayment of principal, interest, fees

Outport Cheque Purchased (OCP)

• Bank buys cheque drawn on an out-station bank, giving immediate funds to customer
• Acts as short-term credit; bank awaits clearing
• Key traits: drawer, payee, amount, date, signature; unique cheque & MICR data
• Risks/fees: exchange rate shifts, clearing delay, fraud, service charges
• Process: identification → application → approval → payment for cheque → deposit/cash by beneficiary → borrower repays bank per agreement

Fixed / Term Loan

• Lump-sum disbursed, repaid in equal instalments over fixed period
• Fixed interest rate and schedule; tenure usually 1{-}5 years
• Predetermined principal amount; may require collateral
• Process: application → credit assessment → offer & acceptance → disbursement (lump/multiple) → fixed repayments → completion at full payoff

Housing Loan

• Long-term, secured by property purchased/constructed
• Loan amount based on property value & borrower capacity
• Tenure 10{-}30 years; interest may be fixed or floating (generally lower than unsecured loans)
• Costs: processing fees; possible prepayment charges
• Eligibility: income, credit score, employment stability
• Process: application → credit check → property valuation → offer → acceptance → funds to borrower/seller → repayments → ownership transfer after full repayment

Personal Loan

• Unsecured credit for discretionary personal expenses
• Fixed principal; fixed or variable rate; tenure 1{-}10 years
• Quick online/offline application; fast disbursement; no usage restrictions
• Requires good credit score; higher rates than secured loans
• Process: assess needed amount → check credit score → compare lenders → submit documents → apply → approval & disbursement → repay per schedule

Quick Revision Points

• Overdraft & OCP = short-term working-capital tools
• Fixed/Term, Housing, Personal loans = instalment-based credit
• Secured loans (Housing, some Term) usually lower rate than unsecured (Overdraft, Personal)
• Key cost components: \text{Interest}, fees, penalties; always match repayment ability to tenure