Loan and EMI terminology.
Definitions for terms you'll encounter when applying for a loan, reading a sanction letter, or talking to a banker.
Amortization
The process of paying off a loan with regular EMIs. The amortization schedule shows the principal-vs-interest split for each EMI over the loan's life.
Balance transfer
Transferring an existing loan to a new lender, usually to get a lower interest rate. Also called refinancing. Involves processing fees with the new lender and possibly foreclosure charges with the old.
Base rate
The minimum interest rate at which a bank can lend, as set by RBI. Replaced by MCLR in 2016, which was replaced by EBLR (External Benchmark Lending Rate) in 2019 for retail floating-rate loans.
CIBIL score
Your credit score from TransUnion CIBIL, on a scale of 300-900. The most widely used credit score in India. A score above 750 is considered good; banks offer their best rates above this threshold.
Co-applicant / Co-borrower
A second person on the loan, jointly responsible for repayment. Their income is included in eligibility calculation, and their credit score affects approval. Common for home loans (spouse) and education loans (parent).
Disbursement
When the bank transfers the loan amount to your account. For home loans on under-construction property, disbursement may happen in stages (called "tranche-based disbursement") as construction progresses.
EBLR (External Benchmark Lending Rate)
The benchmark used by Indian banks for retail floating-rate loans since October 2019. Most banks link it to RBI's repo rate. Your loan rate = EBLR + spread (typically 1-3%).
EMI in advance vs EMI in arrears
EMI in arrears: first EMI is due a month after disbursement (standard for home and personal loans). EMI in advance: first EMI is due on disbursement date (more common for car loans).
FOIR (Fixed Obligation to Income Ratio)
The percentage of your monthly income that goes to existing loan EMIs. Banks use this to determine how much more you can borrow. Most banks cap FOIR at 50-55%.
Foreclosure
Paying off a loan fully before the tenure ends. Floating-rate retail loans cannot have foreclosure charges (RBI rule). Fixed-rate loans may charge 2-5% of outstanding principal.
LTV (Loan to Value)
The ratio of loan amount to the value of the asset financed. For home loans, LTV is typically 75-90%. The remaining 10-25% is the down payment.
MCLR (Marginal Cost of Funds Based Lending Rate)
Replaced "base rate" in 2016 as the internal benchmark for bank loans. Replaced by EBLR for retail floating-rate loans in 2019, but still used for some commercial and older retail loans.
Moratorium
A period during which you don't pay EMIs. Common for education loans (during the course + grace period). The bank may or may not charge interest during the moratorium, which gets added to the principal.
NPA (Non-Performing Asset)
A loan account where payments are overdue by 90+ days. NPAs damage your credit score significantly and can lead to legal action by the lender.
Prepayment / Part-prepayment
Paying more than the EMI to reduce the principal faster. Reduces total interest paid. For floating-rate retail loans, no charges apply.
Pre-EMI
For under-construction home loans: during construction, you pay only the interest on the disbursed amount (not the full EMI). Full EMI starts after possession or after full disbursement, whichever is earlier.
Processing fee
Upfront charge by the lender to process your loan, typically 0.25-1% of loan amount. Plus 18% GST. Sometimes negotiable for prime customers.
Repo rate
The rate at which RBI lends to commercial banks. RBI's primary monetary policy tool. When RBI raises the repo rate, retail floating-rate loans typically follow suit within a few months.
Sanction
The bank's formal approval of your loan, captured in a sanction letter. Sanction is conditional on you providing certain documents and meeting certain criteria. Sanction is not disbursement — you can still walk away.
Section 24(b)
The Income Tax Act section allowing deduction of home loan interest from taxable income, up to ₹2 lakh per year for self-occupied property.
Section 80C
The Income Tax Act section allowing deduction of certain investments and expenses from taxable income, up to ₹1.5 lakh per year combined. Includes home loan principal repayment, PPF, ELSS, life insurance premiums, etc.
Section 80E
The Income Tax Act section allowing deduction of education loan interest from taxable income. No upper limit. Available for 8 years from when repayment starts, or until the loan is fully repaid, whichever is earlier.
Section 80EEA
Additional ₹1.5 lakh deduction on home loan interest for first-time buyers of properties with stamp duty value up to ₹45 lakh. Subject to specific eligibility windows.
Spread
The premium a bank charges over the benchmark rate. Your loan rate = EBLR (or MCLR) + spread. Spread is fixed at loan origination and typically doesn't change.
Tenure
The duration of the loan in years (or months). Longer tenure means lower EMI but higher total interest paid.
Top-up loan
Additional loan from your existing lender, on top of your current home loan. Typically offered to home loan customers with 12+ months of clean payment history. Rates are 0.5-1% higher than the underlying home loan but cheaper than personal loans.