What are the different types of loans in India?
Everyone needs money to fulfill some needs like to buy a house, to buy a car, education of children, start a new business, expansion of business, agricultural expenses, etc. Few people have money with them so its easy to fulfil needs for them. But, few people don’t have money so they need to take loan. They can borrow money from lenders. Lets read about loans and different types of loans.
From old times, people borrow money from lenders against some security like land or property, gold, etc. Borrower has to pay some interest on money. When borrower returns money with interest, he gets his property ownership or gold back. People can take money from bank too. From wherever you borrow money, collateral or trust has to be there. Collateral means some security against which a borrower receives loan. Collateral is there as if in case borrower doesn’t repay loan then lender can sell collateral and recover his money back. If collateral is not there then trust part is there. Trust that borrower will return money back.
So, this borrowing and lending is known as loan. When lender gives money to individual or company with certain security or trust that borrower will repay the money with some benefits like interest, this process is known as loan.
Loan has 3 components:
- Principal-the amount of money borrowed
- Rate of interest
- Tenure or duration
Generally, people take loan from bank or non-banking financing company (NBFC) as they follow government norms and people can trust them.
Types of Loans
Loans are divided into many types based on security provided by borrower, based on the purpose and based on the pledged asset.
| Secured Loans | These types of loans require the borrower to pledge collateral to borrow money. In case if borrower doesn’t repay borrowed money, bank has right to used collateral to recover pending money. The interest rates are lower as compared to unsecured loans. |
| Unsecured Loans | These types of loans do not require any collateral. Loan is given on the basis of borrower’s past relationship with bank, credit score. Bank decides whether to give loan or not. Interest rates are higher as compared to secured loans as bank has no option to recover the loan in case borrower defaults to pay back the loan amount. |
Read more: Where to invest money for regular monthly or yearly income
Types of Secured Loans
| Home Loans | Home loan is taken to build a new house, renovate/renew the existing house, purchase a plot. The tenure of home loan is longer. |
| Loan against property (LAP) | In this type, the loan is given against any residential, commercial or industrial property. The amount of loan is percentage of value of property. Generally, 50% to 80% of property’s value is given. But it depends upon lender. Businesses use LAP to expand business. |
| Loan against the insurance schemes | If insurance scheme is eligible for loan, loan can be availed. All policies are not eligible for loan against insurance scheme. Policies like endowment and money back policies which have maturity value are eligible. Loans cannot be taken at the beginning of the insurance policy. After 3 years into the scheme, policyholder can apply for a loan against insurance. |
| Gold loan | Loan against gold ornaments is very common since old time. Gold loan is secured type of loan as gold is kept as collateral. Gold loan is taken to generate cash for business expansion, education of children, medical emergencies, etc. The amount of loan received is in some proportion of weight of gold. If gold ornament is kept as collateral then weight of stones, gems used in ornament wont be used in calculating loan amount. |
| Loan against mutual funds and shares | Mutual fund and shares can also be kept as collateral to get loan. Mutual fund is a long term investment. Typically, 60%-70% of the value of units pledged is availed as loan. |
| Loan against fixed deposits(FD) | A fixed deposit does not only give assured return, it can also be useful to take loans. In this type of loan, fixed deposit is kept as collateral. 70% to 90% of FD’s value is given as loan. Interest rate of loan against FD is higher than fixed deposit rate. |
Read more: Best Investment Options for Senior Citizens
Types of Unsecured Loans
| Personal loan | A personal loan is taken for family wedding, vacation, home renovation, meet unexpected expenses. It is a very popular type of loan as it gives instant liquidity. As it is unsecured, borrowers needs to have good credit score, high and stable income. Interest rates are higher. |
| Short term business loan | This type of loan is taken to meet expenses of small businesses like working capital loan, machinery equipment finance, loan for traders, manufacturers. |
| Education loan | Education loan provides money to students for school or college fees. It covers the basic fees of the course, the exam fees, accommodation fees, and other miscellaneous charges. |
| Debt consolidation loan | Debt consolidation loan consolidate all existing debts into single. It combines all loan EMIs into single EMI repayment which has to be paid on particular day of the month. |
| Flexi loan | With flexi loan, required funds from sanctioned limit can be taken and used. Interest is paid on the amount of fund which is used, not on the amount which is sanctioned. EMI can be saved with this type of loan. Interest can be paid as EMI and the principal amount can be paid at the end of tenor. |
| Vehicle loan | Vehicle loan is taken to buy new or used two wheeler or four wheeler vehicle. Vehicle loan does not pay 100% amount of vehicle, down payment has to be made by borrower. Borrower’s credit score, ratio of debt to income, loan tenor play important role in determining the loan amount. |
Takeaway:
We read how do loans work and classified. There are various types of loans. Generally types are divided based on security provided, based on purpose, pledged asset. So, when you want to take loan for specific purpose, you have lot of options available.
