What is Loan Disbursement and How does it work?

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 keys to being financially successful is understanding when a loan is a good solution for your situation. Loans are never 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 loan disbursement?

Disbursement can also refer to a loan payment, such as a student 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 multiple disbursements, such as once in a semester.

What is Loan Disbursement
What is Loan Disbursement

But before understanding loan disbursement, it is important to understand the disbursement term. read also What is Professional Tax

Disbursement Meaning

In 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 and operating expenses on loans. This can be in the form of cash payment, electronic fund transfer, check and other forms of payment.

Each disbursement is recorded in the company’s ledger, along with the details of the transaction, including the date, amount, which was paid, and the method of payment. The reason for payment is also included and it affects the cash balance of the company.

Tracking disbursements helps companies monitor cash flows to ensure that what they are spending does not exceed what they are incurring.

The company accountant usually makes entries in a separate cash disbursement journal, and then transfers them to the General Ledger 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 for making purchases or other transactions. Disbursement can be done using cash or other modes of payment.

Example of Disbursement

Some examples of disbursements are payroll expenses, rent, taxes or insurance premiums. In organizational structures, the finance department is often the one that 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 through purchase of 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 at the time of signing the agreement and receipt of invoice and asset. Nevertheless, the actual disbursement of money will be on quarterly basis, starting three months after the signing of the deal. It shows the difference between expenditure and disbursement.

What Is a Loan Disbursement Meaning

What is the meaning of loan disbursement?

A loan is disbursed when the agreed amount is actually paid into the borrower’s account and is available for use. Cash is debited from the account of the lender and credited to the account of the borrower.

There are 3 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, it may happen that the bank may sanction you for a loan of only 30 lakhs due to some reasons.
  • Disbursed Amount: The amount that has been utilized out of 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 only pay interest on the disbursed amount, 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. In this step the loan amount will be deposited in the applicant’s bank account. Before this the lender will verify the submitted documents along with the loan application and credit score of the individual. It also verifies whether the applicant is eligible for the desired loan amount or not. It is important for the applicant to read the terms and conditions clearly before signing the loan agreement.

Disbursement of loan is the stage in the entire loan process when the lender credits the amount to the applicant’s account. Means, a person seeking loan for any purpose finds the sanctioned amount in his account (either in full or in part) to be utilized for the stated purpose.

To understand this , let me take an example.

Let’s say I have applied for a certain amount as an online loan to ICICI Direct in India. Let’s say the amount for the purchase of a BHK flat is ₹ 40,00,000. After verification of documents and identity, the authority in charge will give green signal to the disbursement department. This department credits the sanctioned amount to the loan applicant’s account. This is called disbursement of debt.

The disbursement period varies with different financiers. With the introduction of technology, the entire loan process by any financier has been much quicker and the documentation process takes very less time. However, for post verification post approval, it takes 2-3 working days.

The best part is that the amount is transferred to the account as soon as it is approved. My advice is to pay attention to the interest rate of the financier. It would be better to compare the rates with other service providers.

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: Based on the submission of required details and documents, the financial institution will analyze the application. From the current residential address to the CIBIL score, all the details are thoroughly checked. Once all the details are verified by the bank, the loan amount is sanctioned
  • Loan Disbursement: After the sanction of the loan, 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 major difference between the two – a sanction letter only guarantees to the borrower that the loan has been sanctioned and 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 any further scrutiny. A loan disbursement is the actual delivery of the amount from a bank account to a bank account after verification of the loan and any other necessary verifications.

Types of Loan Disbursement

Here are the different modes of disbursement:-

  1. Full 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 name of the builders.
  2. Partial Disbursement: Partial payment is done 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 if it is 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 through 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 true or not. Based on this, your bank or financial institution will approve the loan eligibility.

Next comes the most important part which is the loan disbursement process, where you transfer cash to your account. It is done either in full or in installments and does not exceed three instalments.

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 who are planning to start on a small scale. If you have a plan for your own start-up, you can take a 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 name of the company. Some lenders also issue a check that requires you to manually go to the bank and deposit it so that the amount shows up in your account. However, this is considered only if the borrower desires such transfer.