Explore the different types of loans in India with insights on personal, home, education, and business loans, empowering informed financial decisions for a secure future.
We may not always have the necessary funds to do or purchase certain things. In such situations, individuals and businesses/institutions opt for loans from lenders.
The process of lending or taking a loan occurs when a lender offers money to an individual or corporation with a guarantee or based on faith that the recipient would repay the borrowed funds with specific added advantages, such as an applicable interest rate.
A loan has three components:
- The principal or borrowed amount
- The interest rate.
- Tenure or duration for which the loan is granted.
Most of us prefer to borrow money from a bank or a reputable non-banking financing business (NBFC) since they are bound by government laws and are reliable. Lending is a primary financial product offered by any bank or NBFC (Non-Banking Financial Company).
Different Types of Loans in India
Loans are further classified as secured and unsecured, open-end and closed-end, and conventional.
1. Secured and Unsecured Loans
A secured loan is one that is supported by collateral. For example, most financial institutions require borrowers to submit title deeds or other documents proving ownership of an item until the loans are fully repaid. Stocks, bonds, and personal property are examples of collateral assets. When borrowing substantial quantities of money, most people ask for secured loans. Because lenders are unlikely to grant significant sums of money without collateral, they use the recipients’ assets as a type of guarantee.
Lower interest rates, rigorous borrowing limitations, and long repayment periods are all prevalent characteristics of secured loans. Mortgages, boat loans, and vehicle loans are examples of secured borrowings.
An unsecured loan, on the other hand, requires the borrower to provide no security. When it comes to unsecured loans, lenders are highly diligent in examining the borrower’s financial situation. They will be able to determine the recipient’s repayment capabilities and decide whether to give the loan or not. Credit card purchases, student loans, and personal loans are examples of unsecured loans.
2. Open-End and Closed-End Loans
A loan can also be classified as either closed-end or open-end. An open-ended loan permits an individual to borrow repeatedly. Although both credit cards and lines of credit have credit restrictions, they are excellent instances of open-ended loans. A credit limit is the maximum amount of money that can be borrowed at any given time.
Depending on his financial needs, a person may opt to spend all or a portion of his credit limit. Every time this person uses his credit card to purchase something, his available credit lowers.
Individuals who have closed-end loans are not permitted to borrow again until they have returned them. The loan balance reduces as repayments are made on the closed-end loan. If the borrower needs more money, he must apply for another loan from the beginning. The procedure comprises submitting paperwork to demonstrate creditworthiness and waiting for approval. Closed-end loans include mortgages, auto loans, and student loans.
3. Conventional Loans
When applying for a mortgage, the term is frequently used. It is a loan that is not guaranteed by government entities such as the Rural Housing Service (RHS).
Different Types of Secured Loans
The following are the various types of secured loans that borrowers can obtain from lending institutions:
Home Loans
Borrowers most commonly obtain these forms of secured loans. Home loans, as the name implies, are used by the borrower to acquire or build a home. In this case, the home itself serves as collateral for the lender. While the home is the primary security, the lender may want collateral security as well, depending on the borrower’s profile and the value of the home. This could be a fixed deposit or another asset. Home loans are long-term loans with loan terms ranging from 10 years to 25 years.
They are normally large loans in the lakhs, but they are also the most inexpensive. The interest rates on house loans range between 7% and 7.5% each year. The loan must be paid back in Equated Monthly Installments (EMIs). Typically, the loan-to-value (LTV) ratio is 80%. This means that the borrower can get a loan for up to 80% of the property’s worth.
Car Loans
Borrowers’ gold is used as collateral for gold loans. In this case, gold serves as a security for the lender, allowing the borrower to pledge the gold with the lender and obtain funds from them. Until the loan is repaid, the lender keeps control of the gold. The interest rate on a gold loan starts at 7.50% per year. Most lenders in this situation demand customers to pay simply the interest on the loan amount each month. Borrowers can repay the principle at any time, and they can reclaim control of the gold. Interest on the unpaid principal must be paid each month until the principal is repaid. Furthermore, the LTV on gold loans might reach 90%.
Gold Loans
Borrowers’ gold is used as collateral for gold loans. In this case, gold serves as a security for the lender, allowing the borrower to pledge the gold with the lender and obtain funds from them. Until the loan is repaid, the lender keeps control of the gold. The interest rate on a gold loan starts at 7.50% per year. Most lenders in this situation demand customers to pay simply the interest on the loan amount each month. Borrowers can repay the principle at any time, and they can reclaim control of the gold. Interest on the unpaid principal must be paid each month until the principal is repaid. Furthermore, the LTV on gold loans might reach 90%.
Loans against mutual funds and shares
Mutual funds can also be used as collateral for loans, making them an excellent vehicle for long-term wealth growth. You can obtain a loan by pledging equity or hybrid funds to a financial institution. To do so, you must write to your banker and sign a loan agreement. Your financier will next write to the mutual fund registrar and place a lien on the precise quantity of pledged units. Typically, you can obtain a loan for 60-70% of the value of the units pledged. Similarly, financial institutions create a lien against the shares for which the loan is accepted, with the loan value equal to a proportion of the share value.
Loans against fixed deposits
A fixed deposit not only provides guaranteed profits, but it can also be useful should you need a loan. The loan amount might range between 70 and 90% of the FD’s value, depending on the lender. It is important to note, however, that the loan tenure cannot exceed the FD’s tenure.
Loan Against Property
This is a type of mortgage loan in which borrowers obtain funds by mortgaging their property with the lender. Loans against property are available for both residential and commercial properties. Loans against property have greater administration fees than home loans. The lender may utilise the funds for either business or personal purposes. In the case of a loan against property, the LTV might range from 65% to 70%. Furthermore, the interest rates for loans secured by real estate are slightly higher than those on home loans. The interest rate starts at 8% each year.
Unsecured Loan Types
The following are the several forms of unsecured loans that borrowers can obtain from lending institutions:
1. Personal loan
A widely favored form of unsecured financing, the personal loan provides immediate liquidity, albeit with higher interest rates compared to secured loans. Securing a competitive interest rate on a personal loan is contingent on maintaining a good credit score and possessing a high and stable income. This versatile financial tool can be utilized for diverse purposes, including managing expenses for a family wedding, financing a vacation or international trip, funding home renovation projects, covering the cost of a child’s higher education, consolidating multiple debts into a single loan, and addressing unexpected, unplanned, or urgent expenses.
2. Short-term Business Loans
Uncertainties might occur at any time in the business. If a company is experiencing financial difficulties, it can seek short-term business loans. These bank loans are designed to assist firms in dealing with short-term uncertainties and financial difficulties. The eligibility conditions are straightforward, and the amount of loan that can be disbursed is determined by the profitability of the business and the borrower’s profile. Short-term company loans can have interest rates ranging from 1% to 1.5% per month, or 12% to 18% per year. firm loans have a higher interest rate than personal loans since there is a risk of losing borrowed funds in the firm. The danger falls on the shoulders of the lenders in such circumstances.
3. Education Loans
The expense of education is rapidly rising. If one wishes to pursue quality education, he or she has to dish out lakhs of rupees. In such circumstances, an education loan offers financial aid. The interest rate on education loans can start as low as 8.85% per year, and the loan amount is determined by the cost of school. Education loan repayment typically begins 12 months after the completion of the education.
4.Loans on Credit Cards
Credit card loans are associated with a user’s credit card account, which may or may not be linked to the card’s credit limit. Loan repayment EMIs are frequently combined with the card’s monthly bill. While these loans can be obtained fast with no paperwork and used for any financial need, their interest rates are often substantially higher than those of personal loans. As a result, they should only be employed as a last resort and for as little money as feasible.
How to Apply for a Loan?
Applying for a bank loan is easier than you would believe. However, before applying for one, you should be mindful of your financial status, as you will be required to repay the loan amount later.
You must first evaluate your needs, and if you believe it is the best option for you, you can either go to the bank and speak with a loan manager, or you may skip all of that and apply online.
Step 1: Based on your research, select the lender you want to borrow from and check your eligibility.
Step 2: Apply for the loan at a bank location or on their official website.
Step 3: Send or upload all required documents and proofs.
Step 4: The bank will process your application and contact you within the specified time frame to tell you of their decision.
Bottom Line:
Individuals in India can discover suitable financial solutions to fit their various demands thanks to a wide range of loan alternatives. It is critical to thoroughly evaluate each loan’s terms and conditions, compare interest rates and payback terms given by different lenders, and select the most appropriate loan that matches with their financial goals and capabilities.
Borrowers should also keep their credit score healthy and practice careful budgeting to ensure timely repayment and avoid any bad impact on their credit history.
