Financial Glossary

A

Amortization

The process of gradually repaying a loan through scheduled EMI payments over the loan tenure. Each EMI consists of a principal component and an interest component. In the early years, a larger portion goes toward interest; over time, the principal share increases. An amortization schedule shows the breakup for every payment across the full loan term.

B

Balance Transfer

Moving an existing loan from one lender to another to benefit from lower interest rates or better terms. Borrowers commonly use balance transfers when a competing bank offers a significantly lower rate, potentially saving lakhs in interest over the remaining tenure. Most lenders allow balance transfers after 12 months of regular repayment, though transfer fees and processing charges may apply.

C

CIBIL Score

A 3-digit credit score (300-900) maintained by TransUnion CIBIL, used by 90% of Indian lenders to assess creditworthiness. A score above 750 is considered good and improves your chances of quick loan approval at competitive interest rates. Your CIBIL score is influenced by repayment history, credit utilization, length of credit history, credit mix, and recent inquiries. Checking your own score does not lower it.

Collateral

An asset (property, gold, vehicle) pledged as security against a secured loan. The lender can seize it if you default on repayments. Providing collateral typically results in lower interest rates because it reduces the lender's risk. Common forms of collateral in India include residential property, commercial real estate, gold ornaments, fixed deposits, and vehicles.

Co-applicant

A person who applies for a loan jointly with the primary borrower, sharing repayment responsibility. Adding a co-applicant with strong income can increase loan eligibility and improve approval chances. For home loans, having a spouse as a co-applicant may also provide additional tax benefits under Section 80C and Section 24 of the Income Tax Act.

D

Disbursement

The actual transfer of the sanctioned loan amount to the borrower's bank account. Disbursement happens after the lender completes all verification, documentation, and approval steps. For home loans, disbursement may happen in stages linked to construction milestones. The loan repayment schedule (EMI) typically begins from the month following disbursement.

DSA (Direct Selling Agent)

An individual or company authorized by banks and NBFCs to source loan applications on their behalf. DSAs help borrowers navigate the loan process, compare offers from multiple lenders, and complete documentation. Nanda Fincap operates as a DSA, connecting borrowers with over 50 partner banks and financial institutions to find the best loan match.

E

EMI (Equated Monthly Installment)

A fixed monthly payment comprising both principal and interest, paid to repay a loan over its tenure. The EMI amount depends on three factors: the loan principal, the interest rate, and the loan tenure. A longer tenure reduces the monthly EMI but increases the total interest paid over the life of the loan. You can use an EMI calculator to plan your finances before applying.

F

Fixed Interest Rate

An interest rate that remains constant throughout the entire loan tenure, unaffected by market changes. Fixed rates offer predictability in EMI amounts, making budgeting easier. However, fixed-rate loans in India are typically 1-2% higher than floating rates and do not benefit from rate cuts by the RBI. They are more common in personal loans and car loans.

Floating Interest Rate

An interest rate that varies based on the lender's benchmark rate (MCLR, repo rate), changing with market conditions. When the RBI reduces the repo rate, your floating rate and EMI may decrease. Conversely, rate hikes increase your EMI or extend your tenure. Most home loans in India are offered on a floating rate basis.

FOIR (Fixed Obligation to Income Ratio)

The percentage of your monthly income that goes toward existing EMIs and fixed obligations. Lenders prefer FOIR below 50%, meaning your total EMI burden should not exceed half your monthly income. A lower FOIR indicates better repayment capacity and increases your chances of loan approval at higher amounts. Reducing existing debts before applying can improve your FOIR.

Foreclosure

Repaying the entire outstanding loan amount before the scheduled tenure ends. Foreclosure eliminates future interest charges and frees up your monthly cash flow. As per RBI guidelines, banks cannot charge foreclosure penalties on floating-rate loans taken by individual borrowers. However, fixed-rate loans and loans taken by non-individual borrowers may attract prepayment charges of 2-5%.

G

GST (Goods and Services Tax)

An 18% tax applied on loan processing fees, insurance premiums, and other service charges in India. For example, if the processing fee on your loan is Rs. 10,000, you will pay an additional Rs. 1,800 as GST. Interest on loans is exempt from GST, but all ancillary charges such as documentation fees, legal charges, and valuation fees attract the standard 18% rate.

I

ITR (Income Tax Return)

Annual tax filing document required by lenders as proof of income, especially for self-employed borrowers. Most lenders ask for ITR of the last 2-3 years when processing loan applications. For salaried individuals, ITR serves as supplementary proof alongside salary slips. Filing ITR regularly and showing consistent or growing income significantly strengthens your loan application.

K

KYC (Know Your Customer)

Mandatory identity verification process requiring PAN card, Aadhaar, and address proof before loan approval. KYC is mandated by the RBI for all financial transactions in India. Most lenders now support eKYC (electronic KYC) through Aadhaar-based OTP verification, making the process faster. KYC documents must be valid and the details should match across all submitted documents.

L

LAP (Loan Against Property)

A secured loan where you mortgage your residential or commercial property to borrow funds. LAP typically offers lower interest rates (8-12%) compared to unsecured loans because the property acts as collateral. You can borrow up to 60-70% of the property's market value. The property remains in your possession, but the lender holds the title deed until full repayment.

LTV (Loan-to-Value Ratio)

The percentage of the asset's value that a lender is willing to finance. For home loans, LTV is typically 75-90% depending on the loan amount. A higher LTV means a smaller down payment but also means higher loan exposure for the lender, which may result in stricter eligibility criteria. RBI guidelines cap LTV at 90% for home loans up to Rs. 30 lakh.

M

MCLR (Marginal Cost of Funds-based Lending Rate)

RBI-mandated benchmark rate used by banks to determine floating interest rates on loans. Introduced in 2016, MCLR replaced the earlier Base Rate system. Your loan interest rate is calculated as MCLR plus a spread (markup). MCLR is reviewed monthly or quarterly by banks, and changes are passed on to borrowers at their next reset date. Many banks have now shifted to the External Benchmark Lending Rate (EBLR) linked to the repo rate.

Moratorium

A temporary pause on EMI payments granted by the lender during financial hardship, as seen during COVID-19. During a moratorium, you are not required to make EMI payments, but interest continues to accrue on the outstanding balance. This means the total cost of your loan increases. Moratoriums are granted at the lender's discretion and are not automatic.

N

NACH (National Automated Clearing House)

An automated payment system used by banks to collect EMIs directly from your bank account on a fixed date each month. Setting up a NACH mandate is a standard part of the loan process. It ensures timely EMI payments without manual intervention, helping you avoid late payment penalties and protecting your credit score. You can cancel a NACH mandate after loan closure.

NBFC (Non-Banking Financial Company)

A financial institution registered with RBI that provides loans and credit but is not a commercial bank. NBFCs like Bajaj Finance, Tata Capital, and Muthoot Finance play a major role in Indian lending, especially for segments underserved by traditional banks. They often have more flexible eligibility criteria but may charge slightly higher interest rates compared to banks.

NPA (Non-Performing Asset)

A loan where the borrower has not made payments for 90+ days. Having an NPA severely damages your credit score and makes it extremely difficult to obtain new credit. Lenders classify NPAs into sub-standard, doubtful, and loss categories based on the duration of non-payment. Clearing an NPA and returning to regular payments can gradually improve your creditworthiness over 12-24 months.

P

PLR (Prime Lending Rate)

The base interest rate at which banks lend to their most creditworthy customers. PLR was the primary benchmark for loan pricing before MCLR was introduced. Some older loans still use PLR as their reference rate. The actual interest rate for borrowers is typically PLR plus or minus a margin based on their risk profile and loan type.

Prepayment

Making payments toward your loan principal before the scheduled EMI dates, reducing total interest paid. Prepayment can be partial (paying a lump sum to reduce principal) or full (foreclosure). Even small prepayments can significantly reduce your total interest outgo. As per RBI rules, banks cannot charge prepayment penalties on floating-rate loans for individual borrowers.

Processing Fee

A one-time charge (typically 1-3% of loan amount) levied by the lender for processing your loan application. This fee covers administrative costs including credit checks, document verification, and underwriting. Processing fees are usually non-refundable, even if your loan is not approved. Some lenders offer reduced or zero processing fees during promotional periods.

R

Repo Rate

The rate at which RBI lends money to commercial banks. Changes in repo rate directly affect floating interest rates on loans linked to the External Benchmark Lending Rate (EBLR). When RBI cuts the repo rate, borrowers on EBLR-linked loans see a reduction in their interest rate within the next reset cycle. The repo rate is a key tool used by RBI to control inflation and economic growth.

S

Sanction Letter

Official document from the lender confirming loan approval with terms including amount, interest rate, tenure, and conditions. The sanction letter is issued after the lender completes due diligence and credit assessment. It typically has a validity period (30-180 days) within which you must accept the offer and complete disbursement formalities. Review all terms carefully before signing.

Secured Loan

A loan backed by collateral (property, gold, car). Secured loans offer lower interest rates compared to unsecured loans because the lender's risk is reduced by the pledged asset. Common secured loans in India include home loans, loan against property, gold loans, and car loans. If you default, the lender has the legal right to seize and sell the collateral to recover the outstanding amount.

T

Tenure

The total duration of a loan, measured in months or years. Longer tenure means lower EMI but higher total interest paid over the life of the loan. Home loans offer the longest tenures (up to 30 years), while personal loans typically range from 1-5 years. Choosing the right tenure is a balance between affordable monthly payments and minimizing total interest cost.

Top-up Loan

An additional loan amount offered on top of an existing loan, usually at favorable terms for existing borrowers. Top-up loans are commonly offered on home loans and are easier to obtain since the lender already has your repayment history. They often come with lower interest rates than personal loans and can be used for any purpose including renovation, education, or medical expenses.

U

Unsecured Loan

A loan not backed by any collateral, approved based on creditworthiness. Personal loans and credit cards are common examples of unsecured lending. Because there is no collateral to fall back on, lenders charge higher interest rates (10-24%) and rely heavily on credit score, income stability, and employment history for approval. Loan amounts are generally lower than secured loans.

W

Working Capital Loan

Short-term financing for businesses to cover day-to-day operational expenses like inventory, salaries, and rent. Working capital loans help businesses manage cash flow gaps, especially during seasonal fluctuations. They are available as term loans, overdraft facilities, or lines of credit. Eligibility depends on business vintage, turnover, profitability, and the promoter's credit history.