Loans are essentially funds borrowed with a promise of returning it within a specific tenor. Lenders decide the rate of interest that is fixed, and the borrower has to repay both, the principal amount and interest. In India, there are various types of loans, the following are brief descriptions of them:
Types of loans:
There are various types of loans obtainable in India and based on whether they require collateral, loans are classified into secured loans and unsecured loans. Following are descriptions about each type:
I. Secured loans: Secured loans do require collateral, as a security for the funds you're borrowing you have to provide an asset to the lender. By doing this, if by chance you are unable to repay the loan, the lender still has some assurance to obtain the money back. Secured loans tend to have a lower rate of interest as compared to the loans without collateral.
Following are the types of secured loans:
Land purchase loan: You purchase land for the new home
Home construction loan: This is given for building new home
Home loan balance transfer: In this type of loan, you can transfer the balance of existing home loan at a lower interest rate
Top up loan: This is used to renovate the existing home or have the latest interiors in the new home
One of the most common forms of secured loans are loans against property. In this type of loans, one can pledge any commercial, residential, or industrial property for availing the required funds. The loan amount is equivalent to a certain percentage of the property’s value, and it varies across lenders. Loan against property enables us to unlock the dormant value of our asset and be used to satisfy our personal life goals. in contrast, businesses use such loans to expand their business, R&D, and product development among others.
There are loans availed against an individual's insurance policy. However, do bear in mind that not all insurance policies qualify for this. Only some policies such as endowment and money-back policies that have a maturity value are used to avail loans. It’s vital to know opting for loans against endowment and money-back policies is possible only after they’ve acquired a surrender value. Such policies acquire a surrender value only after paying regular premiums continuously for around three years.
Gold for the longest time has been one of the most preferred asset classes. Gold loans require the individual to pledge gold coins or jewellery as collateral. The loan amount sanctioned is up to a certain percentage of the gold’s value pledged. Gold loans are commonly used for short-term requirements, and they have short repayment tenors.
One ideal vehicle for creating long-term wealth is mutual funds, and they can be pledged as collateral for obtaining loans. For availing loans, one can pledge equity or hybrid funds to the financial institution. For doing so, simply write to your financier and execute a loan agreement. The financier will proceed by writing to the mutual fund registrar, and a lien on the certain number of units will be marked for pledging. A similar act is carried out with shares- the financial institution creates a lien against shares against which a loan is taken, and the loan value is equal to the percentage of the value of the shares.
Fixed deposits offer assured returns, and they also can come as a handy tool when you require a loan. The loan amount may vary between 70-90% of the FD’s value, and they can vary across lenders. However, do bear in mind the loan tenor can’t exceed the FD’s tenor.
II. Unsecured loans
Unsecured loans don't require collateral. Lenders lend the funds based on past associations, and the individual's credit score and history. Thus, to avail these loans, one has to have a good credit history. Due to the lack of collateral, such loans usually have a higher rate of interest.
Types of unsecured loans:
Giving an instant flush of liquidity to individuals, personal loans are known to be one of the most popular types of unsecured loans. However, due to being an unsecured mode of finance, personal loan's interest rates are higher when compared to secured loans. Having a good credit score and high and stable income ensures you can avail these loans at a competitive rate of interest. Personal loans are generally used for the following purposes:
- Manage all expenses of some family wedding
- Pay for a vacation
- Finance own home renovation project
- Fund a child’s higher education cost
- Solidify your debts into a single loan
- Meet unplanned/ urgent expenses/unexpected
Short-term business loans are another type of unsecured loans, which can be used for meeting their expansion and daily expenses by various entities and organizations.
- Machinery loans and equipment finance
- Small business loans for MSMEs
- Loans for women entrepreneurs
- Loans for traders
- Working capital loans
- Loans for service enterprises
- Loans for manufacturers
Flexi Loans
Such type of loans has the facility where one can avail funds from their approved limit and as when required and they've to pay interest only on the amount used. The individual can withdraw its loan limit, various times and prepay when they have extra cash, with no extra cost. Moreover, in this type of loans, there's an option to pay only interest as EMIs, and the principal is payable at the end of the tenor. Based on what their purposes, loans are classified essentially into:
The demand for education loans has increased tremendously in India. Education loans cover the basic fees of the course and allied expenses like accommodation, exam fee, etc. In this loan, the main borrowers are students while their parents, siblings, and/or spouse are co-applicants. Education loans could be obtained for full-time, part-time or vocational course along with graduation and post-graduation course in the fields of engineering, management, and medicine, etc. Once the course completes, the students have to repay the loan.
The unique feature this loan is its moratorium period, wherein the student gets the option of not paying EMIs until after 12 months of completing its course or 6 months after he/she begins working, whichever is earlier.
Vehicle loans are extended in the form of a two or four-wheeler loan that assists the individual to purchase their dream vehicle. These loans are can be obtained either on purchase of a new vehicle or a used one. The credit scores, the ratio of debt to income, loan tenor, etc., do play a critical role in determining the loan amount.
