What is the best definition of Loan Disbursement?
What is meant by Loan Disbursement? If you’ve never taken out a loan to buy something, you’re definitely in the minority! Debts can be a big deal, but they can also get you in trouble. One of the primary keys to being financially successful is understanding when a loan is a good solution for your situation. Loans are never ever a good idea if you cannot afford to pay them back in the required time frame. But there are many loan terms, one of which is Loan Disbursement.
What is meant by loan disbursement?
Disbursement can also refer as a loan payment, such as a education loan. When a student gets an education loan from the government or a private lender, the lender sends the money to the school, and the school pays or disburses the money to the student after deducting tuition and fees. A student typically receives a student loan in several disbursements, such as once a semester.
But before understanding loan disbursement, it is essential to understand the disbursement term.
What is meant by disbursement?
In an accounting context, a disbursement, also called a cash disbursement or cash payment refers to a wide range of payment types made over a specific period, including interest payments on loans and operating expenses. This can be in cash payment, electronic fund transfer, check, and other forms of payment.
Each disbursement is recorded in the company’s ledger, along with details of the transaction, including the date, amount, which was paid, and payment method. The reason for payment is also included, and it affects the company’s cash balance.
Tracking disbursements helps companies monitor cash flows to ensure that spending does not exceed what they are incurring.
A company accountant usually makes entries in a separate cash disbursement journal and then transfers them to General Ledger, usually once a month. By keeping a separate cash ledger, a company can better track where its cash goes and how much it spends on specific types of expenses.
For businesses, such payments are a part of their cash flow and a record of daily expenses. If revenue exceeds such outflow, it may be an early sign of insolvency.
A disbursement is a payment of funds, whether making purchases or other transactions. Disbursement can be done using cash or other modes of payment.
Example of Disbursement
Examples of disbursements are payroll expenses, rent, taxes, or insurance premiums. In organizational structures, the finance department often handles the disbursement program where all of the company’s financial commitments are paid on time.
Example
ABC Ltd. A company named Electric Outlet Voltage Protector is a major manufacturer. The business is currently growing, and the Board of Directors has decided to invest in a mega project to augment the manufacturing facilities by purchasing machinery. The purchase amount is estimated to be Rs.10 lakh, and the supplier has established a payment plan of 4 consecutive quarterly payment plans, each for an amount of Rs.2,50,000.
From the accounting point of view, the asset will be recorded immediately when signing the agreement and receipt of invoice and asset. Nevertheless, the actual disbursement of money will be every quarter, starting three months after the deal’s signing. It shows the difference between expenditure and disbursement.
Also read: How to get Education Loan? By Team Facts of Accounting!
What is the meaning of loan disbursement?
A loan is disbursed when the agreed amount is paid into the borrower’s account and is available for use. Cash is debited from the creditor’s account, and the borrower is credited to the borrower’s account.
There are three different terms when it comes to loans
Application Amount: This is the amount you are applying for. You may wish to apply for a loan of 40 lakhs to pursue your higher education.
Approved / Sanction Amount: This is the amount for which the bank has approved you after their due diligence. It will be less than or equal to the application amount. In the case mentioned above, the bank may sanction you for a loan of only 30 lakhs due to some reason.
Disbursed Amount: The amount that has been utilized from the sanctioned amount. Maybe you got the approval of 30 lakhs. But you got a scholarship or decided to use your savings for your education. You take only 5 lakh as a loan from the bank. This is the amount distributed.
While it is a common practice that you will pay interest only on the amount disbursed, I would strongly advise you to check the loan terms to understand if this is the case.
Also note, that the processing fee, if based on % basis, is generally based on the sanctioned amount (or application amount).
Definition of loan disbursement
Loan disbursement is the last step in the loan process. The loan amount will be deposited in the applicant’s bank account in this step. Before this, the lender will verify the individual’s loan application and the documents submitted along with the credit score. It also verifies whether the applicant is eligible for the desired loan amount or not. The applicant needs to read the terms and conditions before signing the loan agreement.
Disbursement of a loan is the stage in the entire loan process when the lender credits the amount to the applicant’s account. This means a person seeking a loan for any purpose finds the sanctioned amount in his account (either in whole or in part) to be utilized for the stated purpose.
How long does it take for the money to be credited after disbursement of the loan?
After disbursement, the loan will be credited to your account within 24 hours. It also depends on the lenders and banks.
What is the difference between Sanction and Disbursement?
Loan Approval: The financial institution will analyze the application based on the submission of required details and documents. The details are thoroughly checked, from the current residential address to the CIBIL score. Once the bank has verified all the details, the loan amount is sanctioned.
Loan Disbursement: After the loan sanction, the loan amount will be disbursed in one or more installments based on the verification of the property and other terms and conditions as mentioned in the sanction letter.
People often get confused between loan sanction and disbursement. There is a significant difference between the two — a sanction letter only guarantees that the loan has been sanctioned to the borrower. The amount will be disbursed if the checks and all the verifications related to the loan are done successfully. It does not mean that the loan amount will be disbursed without further scrutiny. Loan disbursement is the actual delivery of the amount from a bank account to a bank account after verification of the loan and other necessary verifications.
Types of Loan Disbursement
Here are the different modes of disbursement:-
Total Disbursement: A complete disbursement occurs when the bank hands over the entire amount in one go. If the home-buyer is buying a house from a builder, the check will be given in the builder’s name.
Partial Disbursement: Partial payment is made in phases. While buying an under-construction apartment, the disbursement amount will be released in phases based on the stage of construction.
How is the home loan disbursed?
When it comes to taking a loan, especially a home loan, you need to be concerned about the process as you do not want to do anything wrong.
First, apply for a home loan and wait for it to be approved. The sanctioned amount will depend on your credit score and your assets, as the company will give you the loan based on that. When your loan is approved, you will be notified by the institution or the financial institution.
While applying for a loan, you need to do the documentation properly as it is the most important part on which your loan approval process depends. A background check will be carried out, verifying whether the information you have provided is accurate or not. Your bank or financial institution will approve the loan eligibility based on this.
Next comes the most crucial part: the loan disbursement process, where you transfer cash to your account. It is done either in whole or in installments and does not exceed three installments.
Arrangements can be made to disburse the amount in full, depending on the type of loan taken by you. This is for business loans below 30 lakhs. Hence, it is the best job for those businesses planning to start on a small scale. If you have a plan for your start-up, you can look at other schemes where you can get a higher loan amount.
How are business loans disbursed?
Like any other type of credit, the loan amount of a business loan is disbursed into the borrower’s bank account. Since the loan is used for business purposes, the loan must be taken in the company’s name. Some lenders also issue a check that requires you to manually go to the bank and deposit it to show up in your account. However, this is considered only if the borrower desires such a transfer.
Thanks for taking the time, and have a nice day!
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