Different types of loans in India

Dinesh Maheshwari April 15, 2019

In India, taking a loan has become a simplified process; but the different types of loans available from banks and lenders can make it hard to narrow down on the right choice. While there are many personal loan types based on the borrower’s requirement, there are essentially two types of bank loans which are based on whether or not the loan is availed against collateral provided by the borrower. A secured loan is when collateral is pledged against the loan, and an unsecured loan is when there is no collateral provided as security against the loan.

In this article, we’ll discuss the different types of loans one can avail as a borrower.

I) Secured Loans

As mentioned above, secured loans are loans in which you have to provide collateral as a security to the lender in order to avail the loan. 2. Gold Loans In India, gold has been considered as one of the best assets to own. Taking a gold loan will require you to provide gold coins or jewellery as security. The loan amount that is sanctioned is based on a percentage of the value of gold pledged. Generally, gold loans are availed for short-term purposes and therefore have a shorter repayment tenure as compared to loans against property and home loans. 3. Home Loans Home loans provide the borrower with the funds to purchase or build the home they want. It is important to keep in mind that if you’re purchasing a new property, the lender will require a down payment of at least 10-20%, while the rest is financed. There are different types of loans that fall within the category of home loans, as follows:Home construction loan: These loans are to build a new homLand purchase loan: Loans to purchase the land for building a homHome loan balance transfer: The balance of one’s current existing home loan can be transferred to a lower rate of interesTop up loan: These are availed for the purpose of renovating an existing home, or upgrading/remodelling the interiors of your home4. Loans against propertOne of the types of loans that are commonly availed is loan against property, in which you can take a secured loan against a residential, commercial or industrial property. The loan amount sanctioned is equal to a particular percentage of the property value, and this varies from lender to lender. Certain lenders may provide only up to 50-60% of the property’s value, while others may provide as much as 80%. The advantage of taking a loan against property is that it can utilize the dormant value of your property asset in order to fulfill financial requirements for personal situations,5. Loans against mutual funds & shareSome lenders will provide a secured loan against the amount of your mutual funds or shares; however, you won’t be able to borrow a large amount under this type of loan6. Loans against fixed depositUnder this type of loan, your fixed deposit is the collateral. Usually, the amount one can borrow is around 70-90% of the fixed deposit’s value. Additionally, the interest rate with loans against fixed deposits tends to be much higher than the fixed deposit rate. It is also worth noting that the tenure of a loan taken cannot be longer than the tenure of the fixed deposit7. Loans against insurance policBelieve it or not, you can take out a loan against your insurance policy. In this case, one must keep in mind that not all insurance policies will qualify as security against a loan. Only certain types of policies such as money-back and endowment policies which have a maturity value are eligible for availing a loan.Essentially, you won’t be able to avail a loan against your term insurance plan since it doesn’t have maturity benefits. In addition, loans cannot be taken out against plans that are unit-linked, since the returns are not guaranteed and are subject to market performance. One can opt for a loan against endowment as well as money-back policies once they have earned a surrender value. Such policies earn surrender values only after making regular premium payments for 3 years.

II) Unsecured Loans

1. Personal Loan Personal loans are one of the most common types of loans. They are generally unsecured and provide instant funds. However, as personal loans are unsecured, they come with higher interest rates than secured loans. One of the ways you can get an unsecured personal loan at an attractive interest rate is by maintaining a good credit score, as well as earning a stable salary. A personal loan can be availed for the following reasons: Paying off unexpected or urgent expenses High utility bills Home repairs and renovation Weddings and family functions Hobby courses Higher education Debt consolidation 2. Short-Term Business Loan Another one of the types of loans you can avail is for expanding one’s business and meeting other business expenses. This includes the following: Small business loans Loans for service enterprises Loans for women entrepreneurs Machinery loans and equipment finance Loans for manufacturers 3. Education Loan Education, especially for higher studies, has exponentially increased in recent years. Fortunately, education loans cover course fees and other related expenses of studies such as accommodation. With education loans, the main borrower is the student, while parents, spouse and siblings are co-applicants. Education loans can be availed for any course, be it full-time, part-time, or vocational. Education loans are perfect for graduation and post-grad courses in any field. By the time the course is completed, the loan must be repaid by the student. One unique feature of education loans is the moratorium period, in which the student can opt to not pay EMIs until 12 months of finishing their course, or 6 months after they begin working, whichever is earlier. 4. Flexi Loan Flexi loan is another type of loan from which you can take funds from your approved loan limit, whenever you require it. Interest is paid only on the amount that is used. One can also make multiple withdrawals on their loan limit and prepay when you have funds, with no extra fees. This facility grants the borrower more freedom and control over their finances, as opposed to rigid term loans. Additionally, they also provide savings up to 45% on EMIs. Therefore, there is also the option to only pay interest as EMIs and pay the principal at the end of the tenure. 5. Vehicle Loan Whether it is a two or four-wheeler, vehicle loans can help finance your vehicle purchase. These loans are provided for purchasing new or used vehicles.

When you decide you want to avail a loan, it is up to you whether you want to take a secured or unsecured loan. If you have sufficient collateral available and are willing to pledge it against the amount you want to borrow, then you can avail a secured loan and benefit from attractive interest rates. For people who don’t want to pledge their assets as collateral or don’t have sufficient collateral to pledge for a loan can opt for an unsecured loan.However, keep in mind that a low interest rate shouldn’t be the deciding factor for choosing a loan. You would also want to consider opting for a longer tenure which would make your EMIs fit very easily in your monthly budget, without being a burdenAlso keep in mind that important factors such as your income, credit score, and debt-to-income ratio will play a significant role in determining your personal loan eligibility. Work on ensuring your credit score is good and your finances are in order to have a strong chance for getting the loan amount you want.

Dinesh Maheshwari

April 15, 2019

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