Jagruk Janta.. Let's play a quiz! Presume I granted you a loan of ₹50 lakhs at 10% interest rate for 20 years. Now tell me, How much interest amount would you've paid me after 20 years? Options are.. (A) 15 lakhs, (B) 25 lakhs, (C) 35 lakhs, or (D) 50 lakhs. If your answer is ₹50 lakhs, then it's wrong! Because you will be paying me more than ₹65 lakhs in interest. Tell me one more thing. You would be paying me around ₹48,000 in EMI every month. So in the initial five years, you would've paid me almost ₹35 lakhs. So, your principal outstanding.. How much will that remain after five years, in this case? So, if your answer in this case is also ₹35 lakhs, then it's the wrong answer, again. Because until now, your principal amount would be more than ₹43 lakhs. Benjamin Franklin said that, "If you want to know the value of money, go and borrow (apply for a) loan from the market." So in today's video, I am going to make you a loan expert. Because we will be discussing 50 terms.. which you must know before applying for a loan. Hello friends, I am Rishabh Jain, aka Jagruk RJ. You are watching Labour Law Advisor! and the sponsors of our video are.. Slice Savings Bank. which are offering interest similar to flat repo rate on their savings account. and 7.75% interest rate on FDs for everyone. More on that later. So most of us benefit from the banks. Whether we deposit money in the savings account or FD, bank keeps giving us extra money or interest. But when the banks earn this money.. they lend the same money as loans at a higher rate. This is termed as the bank's 'primary business'. All varied kinds of loans in the world can be differentiated into two categories.. 'Secured loan' and 'Unsecured loan'. Such loans for which you will have to.. mortgage an asset (collateral) equal to or higher than the loan amount. is known as 'secured loan'. And generally, because the risk is lower for the lender. Hence, the interest rate is also lower. The same way you get a home loan after mortgaging your house. You get a car or bike loan after mortgaging your car or bike. 'Gold loan' against gold. 'Loan against FD' against FD. 'Loan against mutual funds and shares' against mutual funds and shares. In fact, 'bill and invoice discounting' is also a kind of a 'secured loan'. You will be able to see these three terms in a secured loan. In real estate, i.e. property or house.. Banks generally mortgage these assets. It means you can stay in the house. But the bank has the right on it. If you failed to pay your EMI or loan, then bank can seize it. But movable assets such as your car, bike or machinery.. which the bank has offered a loan against. Then the word 'mortgage' is replaced by 'hypothecation'. In this, you can use car, bike, or machinery. But if you failed to pay the loan, then bank will take over the house, sell and recover from it. The third word you will hear is 'lien'. This is generally used as a financial instrument. Such as in the case of FD, shares, mutual funds. Again you will be able to view these FD, shares or mutual funds in your account. But you can't mess with it, you can't sell it. Because you have liened and taken loans against it. When you will get the loan payment done, The financial institute will 'lien-free' your asset. Only then will you be able to sell it further. Now, let's head to another category, i.e. 'unsecured loan'. You can't mortgage anything. The bank offers you money based on your intentions. Now, how will banks know about your intentions? The banks checks the individual's income. Whether the individual was able to repay the loan taken before. And the banks are able to gauge all this from your credit score. Now, I don't know what's the issue with the credit score. Our cameraperson Rohan has a credit card worth ₹5 lakhs. I have't been able to get even ₹25,000. So your 'credit card loans'. 'Buy now pay later loans'. Or 'app-based early salary loans'. All these are unsecured loans, personal loans. Now because there is an increased risk on the lender. So the interest rate will, of course be high on this. In the case of app, it is sometimes upto 30%, 40%, 50%. It is 100% interest rate sometimes. Now I shall take you back to eighth class. The money you took originally from the lender. That money is known as principal, i.e. 'मूलधन'. Now everyone in the world won't be as kind as your father. They won't say, "Here son, take ₹1 lakh." "Run your business." "Return those ₹1 lakh after 5 to 10 years." Because with time, the value of rupee keeps reducing with inflation. So after 5 years from today, the worth of ₹1 lakh.. could be ₹80,000. And as per how the INR's value is falling currently, Maybe the value could reduce to ₹50,000. So the money lender will expect me to repay ₹1 lakh. But I will have to repay an extra money too. which is called 'interest' or 'ब्याज'. Now there should be a formula to calculate interest. So the 'interest', which is generally your 'principal amount'.. is calculated annually based on a percentage. If you have opted for loan for a shorter duration, i.e. from 1 to 3 years.. Generally this interest rate is fixed from the beginning itself. Considering you have taken ₹1 lakh from the money lender/ bank. Keep paying them 10% interest on it. But when you take loans for a longer duration, then it gets difficult to fix the interest rate in the beginning. That's how the concept of 'floating interest rate' appears. Just have a look at our economy. You might have received a return of 14% to 15% in PPF, 20 to 25 years ago from today. You will only receive the interest at 8% today. So this floating interest rate is generally calculated on a benchmark. This is called as 'External Benchmark Linked Rate', i.e. EBLR. And in 90% cases, this benchmark is 'repo rate'. Now the banks sometimes hide these floating interest rates. But one thing that's 100% transparent.. is slice's savings account's interest.. which is exactly similar to the RBI's repo rate. That means RBI's repo rate is 5.25%. Then, even you will also receive 5.25%. Now, this interest is credited daily. If the repo rate increases tomorrow, then the interest increases too. And if you get an FD done in slice bank for 1.5 years, then you will receive 7.75% interest on it. Along with DICGC's insurance worth ₹5 lakhs. Because slice is a new-age small finance bank. It's a completely paperless process. You can open the account within five minutes. The link is in the description. Repo rate is that interest rate.. in which the RBI gives loans to banks.. Take this money and lend it forward on interest. So the banks add their 'margin' and 'spread' (difference between two prices) to it. And forward it to customers in the form of home loans, etc. Suppose the current repo rate is at 6%. The bank's spread is at 3%. And the bank has offered you a home loan at 9%. Now suppose the repo rate increases to 7%, then your home loan will automatically increase to 10%. If the repo rate reduces to 5%, then your home loan will automatically increase to 8%. Actually, it should increase that much. But it is often seen that when the interest rate increases, then the banks immediately increase the home loan. But when it reduces, then you have to apply and reduce it. This is your bonus tip, especially in the case of private banks. So make sure whenever the repo rate is declared, Whether your interest rate has adjusted or not, you must check your SMS or account statement. Now few of you might think, I have a belief that the repo rate will increase in the coming years. So why not I apply for a loan at a fixed rate? You can apply for it and your rate will be fixed for the first two years. But after that, it gets converted automatically into.. 'floating' in the case of home loan. Wait a little more in the video ahead. I will give you a bonus tip on this point. I will give you an RBI circular which will be very beneficial for you. Now this EBLR (External Benchmark Lending Rate) is very transparent. Because it is linked with the repo rate. But the old loans were based on MCLR (Marginal Cost of Funds Based Lending Rate) rate. What is MCLR? The bank says that, "I am receiving money at a certain rate from the market." For instance, the bank is receiving money at 10% from the market. Hence, the bank will lend at 12%. Now if I receive at 12% from the market. So your home loan rate will be 14%. So you should not take loans at MCLR. Rather, you must take the EBLR. So now we have understood two types of interest rates. 'Flat rate' and 'floating rate'. But after this interest rate, the calculation is also done in different ways. First is 'reducing balance interest rate'.. This is the logical type of interest rate. For example, you applied for a loan of ₹1 lakh. You have to pay 10% interest on it. You paid ₹20,000 in the first year. ₹10,000 as interest and ₹10,000 against principal. So, you are only left with ₹90,000. So, next year, your interest should be calculated at ₹90,000. We studied this in class eighth. and we used to calculate with the help of long tables. To get full marks. And the one's who didn't get full marks... By taking advantage of their weakness in maths.. A new concept has been introduced in the market. which is known as 'flat interest rate'. Mostly everywhere, when you shop online, You might've seen flat rate of 7% written. It's the same rate. The interest that is calculated on this rate. This is done on your entire principal amount, every year. Doesn't matter how much you've already paid on it. So if it's a reducing balance interest rate.. then your principal will be paid on each of your EMIs. And you will be paying an interest of approximately ₹16,000 for three years. Whereas if it's a flat interest rate, then ₹10,000 in the first year, ₹10,000 in the second year.. And ₹10,000 in the third year too. Overall, you will have to pay an interest of ₹30,000. It means, if it's a 10% 'flat interest rate', in the same example. That is worse than 17% 'reducing balance interest rate'. So wherever you see flat interest rate, doesn't matter how little the amount is. Open an excel or a calculator once. And do the calculation once. Although it seems less, but it is more. Now let's about talk about 'tenure'. If your business doesn't work for four to five years, then your father might also ask you the money back. Whereas, these are banks and financial institutions. They won't say that since you've taken the money. Keep it with you as long as you want. Most loans in the market are offered for a certain period. For instance, home loan is given for 20 years. Car loan is given for 4 to 5 years. Personal loan is given for 6 months to 1 year. So this would be the 'loan's tenure'. In which, you will have to pay the money along with the interest. There is another loan in the market known as a 'revolving loan'. A perfect example of that is a 'credit card'. You have a card.. and the bank has allowed you take loans upto ₹5 lakhs, whenever you want. If you use ₹1 lakh from those ₹5 lakhs in a certain month, then you will have to pay interest on ₹1 lakh. If you don't spend anything in a certain month, then no interest will be levied. The 'OD (Overdraft) facilities' or the 'working capital loans'. In fact, loans against mutual funds. All of these are types of revolving loans. Now let's talk about.. The money that you have taken will have to be repaid. We will have to repay it by paying EMI every month. And whenever you pay EMI, So, certain amount goes into paying the principal.. and certain amount goes into paying the interest. How much goes into principal and how much into interest. This entire schedule is decided by 'amortisation'. This ₹50 lakhs loan has been taken at 9% interest rate for 20 years. If you look at its repayment schedule and amortisation, then you will see that for the initial few years, the majority amount that's been deducted.. that goes into paying the interest.. and certain tiny amounts are being reduced in the principal. Whereas in later years, most of your money will go into paying the principal.. and interest accumulates little over time. Here, the loan you have taken is at 9%. If you repay this for 20 years, then you will repay an overall of ₹1 crore 7 lakhs. ₹50 lakhs will be payable against your principal.. and ₹57 lakhs will be payable against your interest. If I increase the interest rate by 1%, and If I keep my EMI amount the same. Then I will have to pay loan for 27 years instead of 20 years. And overall, I'll be paying almost ₹1.5 crores. My interest payment will increase from ₹57 lakhs to ₹94 lakhs. And let's presume that the RBI increased the repo rate by an additional 1%. And my home loan is at 11%. Now my income hasn't increased. I can only pay the EMI of ₹44,000. So in this case, my loan will never be paid. Because in the first month itself, my interest amount would be ₹45,000. And the EMI that I'll be paying would be around ₹44,000. Let's leave the principal payment, I am not able to pay the entire interest amount. And this additional amount will be added to my principal amount. That means, with year, my principal amount, i.e. the outstanding amount will keep increasing. This is called 'negative amortisation'. The old-time labourers used to work on similar system ages ago. As I said I will mention a bonus tip. RBI introduced this circular some time ago. They said that whenever your rate circulates.. First of all, you will have to inform the customer. The customer has to be given an option. Whether he can keep the same EMI amount and increase his tenure.. or keep his tenure same and increase the EMI amount, or anything in between. And in any case, this negative amortisation cannot happen. Due you remember the COVID times. The government introduced a rule that you don't have to your EMI for a certain period. It means you were given a 'moratorium'. But remember one thing, whenever you receive a moratorium. It has it's own cost. Your interest... It still gets calculated on the back end. That is, either you will pay more EMI in the long term. or If the EMI number is same, then your EMI amount will increase a little. If you are applying for a home loan, then construct a home. You will be able to view a pre-EMI term. Now, as you need ₹40 lakhs to construct a house. You won't be spending ₹40 lakhs on Day 1. So, you will inform the bank.. that you need ₹10 lakhs in the initial six months, and then ₹10 lakhs, And by the 18th month, I need the entire ₹40 lakhs. So, until the bank disburses the complete amount to you. It will only charge the interest on the amount given until then. And the day, the bank disburses the entire amount, your proper EMI will start from that month onwards. In which you will have to do the repayment of both the interest and principal. So, until the entire loan amount is disbursed, The initial EMIs that the banks collect from you. Those are known as 'pre-EMI'. The interest that you are paying on your loan.. There is a hack to pay the interest in less time. So, the EMI paid by you in a certain month. Part of it goes to the interest payment and part goes to the principal payment. But if you paid a different amount to the bank other than the stated one. then the entire money will go towards your principal payment. For example, if in a year, instead of paying 12 EMIs. If you start paying 13 EMIs. If you start paying an additional EMI, what will happen then? Mandeep has explained that beautifully. The amount that I've considered in 'pre-payment per year' is equivalent to 'EMI'. If I consider 1 in it.. that means, automatically, I will be prepaying one EMI amount in the last month of each year. And as soon as I did this, the interest amount of ₹30 lakhs shown earlier. Now that has become ₹24,80,000. It means I saved an interest of ₹5 lakhs. Now if you could save more, then you pay an amount equivalent to two EMIs every year. So now the interest would be ₹21 lakhs. I saved an approximate of ₹9 lakhs in interest. And the 20-year loan will be done within 15 years. In fact, it's possible that you will be selected for KBC. You might win ₹7 crores. And instead of purchasing a Maybach.. you will be able to repay the home loan entirely in advance. And repay the entire amount to the bank. I want to close my loan quickly. This is known as 'pre-closure' or 'foreclosure'. But the bank says, "No. Not like this." I offered you the loan for 20 years, I would've earned such a huge interest, It's is a loss for me, right? So now the bank will apply foreclosure charges on you. That means a penalty for repaying the loan before time. And this penalty can also be levied in the case of 'balance transfer'. Suppose you have taken a loan from LLA Bank, which is charging a 10% interest from you. Then you approach the slice bank. Slice says that, "Your credit score is very good. We will offer you 9%." So then you head to the LLA bank and say.. "I would like to transfer my balance." So the LLA bank will give you a letter. It will be written, as per today's date, How much principal and interest is due for you.. If you transfer the due amount by today, then I will transfer your balance. You will present this paper to the other bank. The new bank will transfer the stated amount to the previous bank. and your loan account will be shifted from Bank A to Bank B. Here is a ninja technique. Suppose your salary was not increasing for quite a long time. then what would you do? You proceed to find another job. You then receive a higher offer letter from the other firm. You then tell your boss to increase your salary. See, I've received such a good offer letter. Now your boss doesn't want to let you go. So he increases your salary. So, the interest rate that you receive based on the balance transfer. You will often take it to the previous bank. In most cases, the previous bank will reduce your interest rate. So keep doing this exercise every few days. There is a similar term to 'balance transfer', i.e. 'refinancing'. Suppose you have several small loans. 12%, 11% or 10%. But one person tells you.. "To come and take all the money from you." I'll give at 9%. Close all of these small loans." You will only have to repay the money to me." This is called as 'refinancing'. Now, who decides whether you will receive a loan or not. Although in India, people are often judged by their appearance. But a lot of maths is taken into consideration. A lot of factors come into the picture and your.. CIBIL score is formed. Actually, it's not a CIBIL score, but a 'credit score'. Because CIBIL is just one of the agencies. There are multiple agencies in India. which maintains your credit score. Even if your credit score is good, it doesn't imply that you will get a loan. After this, your FOIR and DTI are reviewed. What are all these? FOIR stands for 'Fixed Obligation to Income Ratio'. It means if you earn ₹1 lakh every month. And if ₹50,000 is being deducted as your home loan, personal loan, car loan's EMI. So then your FOIR would be 50%. This is too much. The maximum should be 40%. So the bank will say, you don't have the capacity to service a loan more than this. The second thing they view is the 'debt to income ratio'. If your income is ₹20 lakhs, and if you have applied for a home loan worth ₹1 crore. Then the debt-to-income ratio would be 5:1. You will now tell the bank. "No, No, I want to purchase a house worth ₹5 crores." Please approve a home loan of ₹5 crores. So the bank will say, "It doesn't fit your budget." If you want to apply for such a huge loan amount, then either get a 'guarantor' or a 'co-applicant'. Co-applicant means when two people together combine their individual incomes, And apply for a loan are known as 'co-applicants'. And the guarantor are those individuals who say.. "He is someone I know (or is my child)." 'If he doesn't pay the loan, I will pay on his behalf." In fact, when Mandeep wanted to apply for a home loan, then I became the guarantor. By viewing the credit score, DTI, etc., the bank decides an LTV for you. 'Loan to Value' ratio. For example, if you want to purchase a house worth ₹1 crore. So, the bank can give you an LTV of 90%. offering you a loan amount of ₹90 lakhs. You do a prepayment of 10% to your builder. Whereas, if your credit score is not accurate, you might get a 70% LTV. It means, you will to pay ₹30 lakhs somehow in advance. Eventually then, you will receive ₹70 lakhs as loan. Now, will the bank earn only the interest amount after providing you with the loan. No, the banks earn a lot of money from you. By levying different charges. To send the loan amount via UPI, the bank applies 'processing charges'. It applies 'documentation charges' to verify your documents. To conduct your verification.. whether the person is legit, whether or not he has a house. Vertification charges are levied. If you want to apply a loan against your property. If you want to apply for LAP (Loan Against Property). The bank will say that my staff will visit your place and derive your property value. 'Valuation charges'. Then the entire agreement which will be done on stamp paper. 'Stamp duty’. And suppose you die before repaying the loan. Then you will have to take an insurance for it. i.e. 'insurance bundling'. Now suppose you didn't die. But the second worst thing is that your salary got delayed for that month. So your EMI will bounce. Hence, 'bounce charges' will be levied on you. Worse than that, if you lose your job. If you weren't able to pay your EMI, then 'penal charges' will be levied on you. So when the bank started levying so many charges, then RBI said.. It's quite a bad thing. You will have to inform the customer about APR. You are offering a home loan by stating 9%. But after levying so many charges, then what will be the actual interest rate formed? This is called 'Annualised Percentage Rate (APR)'. So whenever your loan agreement is being formed.. Always demand a KFS, i.e. 'Key Fact Statement'. In this, EMI, schedule, penalties, and along with other charges, your APR will also be mentioned. After everything's done, the bank offers you a 'sanction letter'. And along with it, gets your loan disbursed. As long your loan is being operational with your bank, You can ask your bank for the 'statement of account'.. which will tell you how much principal is due.. and how much has been paid already. How much EMI is left? And finally, after paying all the EMIs, when you become 'EMI-free'. Then definitely get the most important document from the bank.. i.e. 'No Due Certificate', i.e. (NDC). It doesn't matter where you apply for your loan from. But prior to spending that money.. keep it in your slice's savings account. So that you keep receiving interest similar to RBI's repo rate. And that you be saved from inflation a bit. The one's who are still watching the video. Mention 'Ailaa..' in the comment below. So that the one's who are reading the comments get confused.. whether a new trend has started yet. I'll meet you in the next video. Until then, Jai Hind!