What are the Different Types of Loans in India?

A loan is simply the act of borrowing money with the intent to repay it over a predetermined period of time (tenor). You must pay the principle amount and a fixed interest rate determined by the lender on the money you borrowed. The many loan types offered in India are shown below. Loans can be used for a multitude of things in the modern world. You can get a loan to start a business, pay for your education, buy a house, or buy appliances for your brand-new house.

There are many different kinds of loans available in India. The majority of customers choose personal loans over other kinds of loans, despite possessing a variety of assets they can mortgage to receive loans at lower interest rates. 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

How do Secured Loans work?

A secured loan must have security that is equivalent to the borrowed amount. If the borrower defaults on the loan, the collateral assets will serve as a lender’s right that may be lost. These loans offer a lower interest rate compared to unsecured loans. House loans in the nation are given a considerable boost by the Prime Minister’s Pradhan Mantri Awas Yojana. The following categories are used to further categorise secured loans.

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 secured by shares and mutual funds

Mutual funds are a great way to create long-term wealth because they may also be used as collateral for loans. By giving a financial institution stock or hybrid funds as collateral, you can obtain a loan. You must do this in writing to your banker and sign a loan contract.

Next, the mutual fund registrar will send a letter to your financier placing a lien on the number of units that have been pledged. You can usually borrow between 60 and 70 per cent of the value of the units you pledge. Similarly to this, when a loan is accepted, financial institutions encumber the shares with a lien for a percentage of the loan’s value.

3. Loans for gold

One of the most well-liked asset types has historically been gold. According to a KPMG estimate, the organised Indian gold loan market will likely reach Rs. 3,101 billion by 2019–20 because to the variable interest rates offered by banking institutions. A gold loan requires you to put up gold jewellery or coins as security. The amount of this kind of loan is based on a percentage of the gold’s worth that has been pledged. Gold loans have a shorter payback period and are frequently used for short-term objectives compared to home loans and loans secured by the property.

     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.

5. A loan secured by property (LAP)

A loan secured by property is one of the most popular secured loan kinds. You can pledge any residential, commercial, or industrial property to get the money you need. Depending on the lender, the loan amount is equivalent to a different portion of the property’s value.

Some lenders might provide between 50 and 60 percent of the property’s value, while others might go as high as 80%. You can access the untapped potential of your asset by taking out a loan against it, which you can use to pay for personal goals like your children’s higher education or marriage. Companies use a loan against property for a variety of purposes, such as product development, business expansion, and research and 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.

Learning About Unsecured Loans

Several forms of unsecured loans are offered by financial institutions depending on a number of factors, including the borrower’s credit history, repayment history, and other factors. These loan kinds can be used by lenders to finance a range of projects and pay for unforeseen costs without going over budget. These loans in India have a higher interest rate than other loans, nevertheless. The various unsecured loan types that you could use to meet your financial demands are listed below.

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.
• Form-16.

2. Vehicle loans

A vehicle loan is a two- or four-wheeled loan that helps you get the car you want. Both new and used car purchases are eligible for auto loans. The loan amount is determined by taking into account a number of variables, including your credit score, debt-to-income ratio, loan term, and others.

You might be able to close the gap between your desire to own a car and your ability to do so by obtaining a car loan. Having a high credit score is helpful when applying for a car loan because credit reports are used to establish your loan eligibility. Your loan request will be approved promptly, and you might qualify for a lower interest rate. Collateral is used to secure auto loans.

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.
• Form-16.

3.Student loan debt

The demand for education loans in the nation has increased as a result of the necessity for higher education from recognised universities and institutions. This kind of loan covers the basic tuition for the course as well as any additional costs, such lodging, test fees, and so forth. Parents, siblings, and spouses are co-applicants on this loan with the student as the lead borrower.

An education loan can be used to pay for a full-time, part-time, or vocational course as well as graduate and postgraduate management, engineering, and medical courses. The student is responsible for repaying the loan once the course is finished. the moratorium period, during which the student may postpone paying the EMIs until either 12 months after the course is over or 6 months after beginning work, whichever comes first.

4. Flexi Loans

With a Flexi Loan, you can take out a loan whenever you need it up to your authorised maximum and only pay interest once the money has been used. You are free to take out as many loans as you want up to your loan limit and prepay any excess funds at no additional cost. This ground-breaking programme gives you total financial control and enables you to reduce your EMIs by up to 45%, unlike constrictive term loans. Moreover, you have the option to only pay interest via EMIs, with the principle becoming payable at the conclusion 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.

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 INSIDE TAX

Q.What considerations do banks take into account when determining whether or not to offer a loan?

Ans: The applicant’s income level, age, qualifications, and place of residence are taken into account by the lending bank. When determining loan eligibility, previous credit history and credit score are crucial considerations.

Q. A shared loan can be obtained, right?

Ans: Sure, as long as the co-borrower signs the loan application, the lender will accept a joint loan. A co-borrower must be a member of the borrower’s immediate family.

Q. How many joint borrowers may you have at one time when taking out a loan?

Ans: A maximum of six persons can take out a shared house loan type. Only family members, including parents, siblings, and spouses, can be included when applying for a house loan in India. The joint borrower must have a solid credit score and credit history.

Q: What are the things to think about while applying for a loan?

Ans: When applying for a loan, consider factors such as interest rates, repayment flexibility, processing fees, and customer service.