A loan is simply money borrowed with the promise of repayment over a set length of time (tenor). The lender sets a fixed interest rate that you should pay on the money you borrowed, as well as the principal amount. The following are the many types of loans available in India. In today's environment, loans may be used for a variety of purposes. Loans may be used to establish a business, fund an education, buy a home or acquire appliances for your newly purchased home.
In India, there are many different types of loans. Despite having a range of assets that they can mortgage to get loans at a cheaper interest rate, most consumers select a personal loan over other types. One of the causes behind this situation is a lack of understanding of the many kinds of loans available in India. Let us discuss the many types of loans present in the market and the qualities that make these loans beneficial to clients.
What are the Different Types of Loans?
In India, there are many different types of loans in India, which are divided into two categories based on the purpose of the loan type:
- Secured loans
- Unsecured loans
What are Secured Loans?
A secured loan must be backed up by collateral equal to the amount borrowed. The collateral assets are secured to operate as a lender's right that can be forfeited if the borrower fails to repay the loan. When compared to unsecured loans, these loans have a lower interest rate. The Prime Minister's Pradhan Mantri Awas Yojana offers a significant boost to house loans in the country. Secured loans are further divided into the following categories.
Types of Secured Loans
1. Loans against fixed deposits
A fixed deposit (FD) is a type of loan that provides guaranteed returns and can be used as collateral for a loan. Depending on the lender, the loan amount might range from 70 to 90% of the FD's value. It's important to remember that the loan tenor cannot exceed the FD's tenor.
You can get a loan against a fixed deposit if you have an account with a bank. You can apply for a loan of INR 80,000 if your FD is worth around or more than INR 100,000. The interest rate on such a loan is higher than the interest rate paid by the bank on your FD.
2. Loans against mutual funds and shares
Mutual funds can also be used as collateral for a loan, making them an excellent vehicle for building long-term wealth. You can get a loan by pledging equity or hybrid money to a financial institution. You must write to your banker and sign a loan agreement to do so.
The mutual fund registrar will next write to your financier to place a lien on the specified amount of units to be pledged. Typically, you may borrow 60-70% of the value of the units you pledge. Likewise, financial institutions place a lien on the shares whereby the loan is accepted, with the loan value equal to a proportion of the shares' value.
3. Gold loans
Gold has long been regarded as one of the most popular asset classes. As per a KPMG estimate, the organised Indian gold loan sector is likely to reach Rs. 3,101 billion by 2019-20, due to financial institutions' flexible interest rates. You must pledge gold jewellery or coins as security for a gold loan. This type of loan amount is based on a proportion of the value of the gold pledged. Compared to house loans and loans against property, gold loans are often utilised for short-term purposes and have a short payback duration.
4. Loans against insurance policies
You can get a loan backed by your insurance coverage. It should be noted that not all insurance policies are eligible for this type of loan. Only policies with a maturity value, such as endowment and money-back plans, are eligible for borrowing.
As a result, you won't take out a loan against a term insurance policy because it doesn't provide any maturity advantages. Loans cannot be taken out against unit-linked plans since the returns are not guaranteed and are subject to market fluctuations. It's important to remember that you may only take out a type of loan against endowment or a money-back policy when they've gained a surrender value. These plans only have a surrender value after three years of consistent premium payments.
Also Read: Nearly 50% of retail, MSME loans to shift to digital lending in 2-3 years: Union Bank MD
5. Loan against property (LAP)
One of the most common types of secured types of loans is a loan against property. To obtain the finances needed, you might pledge any residential, commercial, or industrial property. The loan amount given varies by lender and is comparable to a particular percentage of the property's worth.
While some lenders may provide 50-60% of the property's worth, others may offer as much as 80%. A loan against property allows you to access the unused value of your asset and can be used to fund personal ambitions such as children's further education or marriage. Businesses employ a loan against property for various reasons, including business expansion, research and development, and product development.
6. Home loan
Home loans are a type of secured credit that allows you to purchase or construct the home of your dreams. The sorts of house loans offered in India are as follows:
- To buy land for your new house, you'll need land purchase financing.
- Construction financing for a house: To construct a new house
- Balance transfer on a home loan: Transfer the remaining balance of your existing mortgage to a lower-interest loan.
- Add-on loan: It may be utilised to renovate an existing home or to create the most up-to-date interior design for a new home.
It should be noted that when purchasing a new property/home, the lender will need a down payment of at least 10%-20% of the property's worth. The amount of money you get depends on various factors, including your income, its stability, and your present responsibilities.
Understanding Unsecured Loans
Financial institutions provide different types of loans without collateral depending on various variables such as the repayment history, borrower's credit score, and other considerations. Lenders may use these loan types to fund a variety of activities and deal with unexpected expenses without breaking the bank. However, compared to other loans, these types of loans in India have a higher interest rate. The following are the several forms of unsecured loans that you might use to fund your needs.
Types of unsecured loan
1. Personal loan
A personal loan is among the most common unsecured types of loans that provide quick cash. They have a higher rate of interest than secured loans since they are unsecured. You can get this loan at a cheap interest rate if you have a solid credit score and a high and consistent income. Personal loans can be used for a variety of things, including:
- Organising all of the costs associated with a family wedding.
- Paying for a vacation or a foreign trip
- Putting money toward a home remodelling project
- Putting money toward your child's further education.
- Combining all of your debts into one loan.
- Meeting unanticipated/unexpected/urgent expenditures
In the last decade, the number of people seeking personal loans to meet various requirements has risen dramatically. Unsecured types of loans grew by around 27%, or four times the bank lending rate, especially during 2015 and since 2018. Lower interest rates, liquidity, and faster disbursements are all factors that have contributed to the surge in borrowing growth. With the aid of a personal loan eligibility calculator, you may get an estimate of how much you're qualified for. Personal loan types require the following documents:
- Aadhar card, driver's licence, and voter's card are examples of KYC papers.
- For self-employed professionals, salary receipts from the previous two months and evidence of income are required.
- Statements from your savings and checking accounts.
- A copy of your income tax return.
2. Vehicle loans
A vehicle loan is a two- or four-wheeler loan that assists you in purchasing your desired automobile. Car loans are available for the purchase of a new or used vehicle. Your credit score, debt-to-income ratio, loan duration, and other factors all play a part in calculating the loan amount.
Getting a vehicle loan might help you bridge the gap between your desire of having a car and actually purchasing one. Because credit reports are used to determine your loan eligibility, having a high credit score is advantageous when applying for a vehicle loan. The loan application will be accepted quickly, and you may be eligible for a cheaper interest rate. Car loans are backed by collateral. If you don't pay your instalments, the lender will repossess your vehicle and collect the loan.
Vehicle loans require the following documents:
- Aadhar card, voter's card, and PAN card
- Bank statement
- Income proof
- Employment / Business Continuity Proof
- 2 passport size photographs.
- Proof of Identity.
- Address proof
- A copy of your income tax return.
3. Education loans
The need for higher education from reputable schools and colleges has boosted the country's demand for education loans. This type of loan covers the course's basic tuition and additional expenses such as housing, test fees, and so on. The student is the principal borrower on this loan, with parents, siblings, and spouses as co-applicants.
A full-time, part-time, or vocational course, as well as graduate and post-graduation courses in management, engineering, and medical, can all be paid for with an education loan. Once the course is completed, the student must return the debt. The moratorium period, wherein the student can defer payment of the EMIs until 12 months after completion of the course or six months after starting employment, whichever comes first, is a unique element of an education loan.
4. Flexi Loans
With a Flexi Loan, you may borrow money from your authorised limit whenever you need it and only pay the interest once the money is spent. You can borrow up to your loan limit as many times as you like and prepay when you have extra money at no extra cost. Unlike restrictive term loans, this innovative programme provides you with complete control over your money and allows you to save up to 45% on your EMIs. You can also choose to pay interest solely through EMIs, with the principal due at the end of the tenor.
5. Short-term business loans
Small business loans are types of loans given to small and medium-sized firms to help them satisfy various needs. These loans may be utilised for a variety of things that will help the company flourish. Purchasing equipment, purchasing merchandise, paying staff wages, marketing expenditures, paying off business debts, paying administrative expenses, and even starting a new branch or acquiring a franchise such as KFC and Dominos are just a few examples.
The business owner's age, the number of years the firm has been in operation, income tax returns, and a statement of the previous year's turnover that a Chartered Accountant has audited are all common qualifying requirements for small business loans.
Also Read: Top 5 Government Loan Schemes for Small Business in India
As long as the funds are used for a legitimate purpose, financial institutions approve secured and unsecured loan types for additional purposes. Pay your bills on time since this goes a long way toward guaranteeing good financial health. Before applying for a loan, be careful to examine the advantages and disadvantages of secured and unsecured loans. To know more about loans, business tips, GST and more, subscribe to Khatabook.