Different Types of Loans and Their Features

A loan is a great way to fulfill your dreams without burning a hole in your pocket. There are numerous types of loans in India that vary in loan purpose and features of loans. 

What are the Various Types of Loans Available in India?

There are a variety of loans in India to choose from depending on your creditworthiness and requirement. We will classify them based on collateral requirements - 

• Secured loans
• Unsecured loans

Different Types of Secured Loans

A secured loan is a type of loan where you need to pledge some asset to procure funds. The collateral must be worth at least as much as the loan amount. 

The collateral assets serve as a lender's security that can be forfeited if the borrower defaults on the loan. The features of loans when it comes to secured loans are low interest rates and easy approvals, unlike unsecured loans.

Learn More About: Pros and Cons of Loans - Secured loans and unsecured loans

Let’s take a look at how many types of loans are there based on loan purpose.

1. Home Loans

Home loans are secured loans that can be used to buy or build the home of your dreams. These loans usually have long tenures of 20 to 30 years. Home loans can be used to buy a plot, and to build a house on it, or to buy a prebuilt house or apartment.

The interest rates on home loans offered by India's most prominent banks start at 8.45%.

Just like in any other loan, the lender will check your credit score before approving your home loan. If you have a decent credit score, there's a good possibility you'll be able to get a house loan at lower interest rates.

The following are reasons why people opt for home loans in India:

• To purchase the land for your future home
• To build a new house
• To transfer your existing mortgage's remaining balance to a lower-interest loan
• To update the interior design of an existing home or to create more modern interior design for a new home
• To renovate your house or apartment

When purchasing a new property/home using funds from a home loan, a down payment of at least 10% -20% of the property's value is required by the lender. The amount of money you receive is determined by a number of variables, including your current income, age, job stability, credit history, and debt-to-income ratio.

2. Loan Against Property

A loan against property is one of the most prevalent types of secured loans. You can use any residential, commercial, or industrial property as collateral to get the money you need. 

The amount of the loan depends on the lender and is based on a percentage of the property's value. Some lenders may lend 50-60% of the property's value, while others might lend up to 80%. 

A loan against property gives you access to the unused value of your asset, which you can utilize to pay for personal goals like your children's education or marriage. 

Funds from a loan taken against property can also be used by businesses for a variety of reasons, including corporate expansion, research and development, and product development.

3. Loan Against Insurance Schemes

You may be able to receive a loan by using your insurance policy as collateral. It's worth noting that this form of financing isn't available for all insurance policies. Borrowing is only possible for policies having a maturity value, such as endowment and money-back plans.

As a result, you won't take out a term insurance policy loan because it doesn't offer any maturity benefits. Unit-linked plans are not eligible for loans because the returns are not guaranteed and are susceptible to market fluctuations.

It's crucial to keep in mind that you can only get a loan against endowment or a money-back policy if they've grown in value. After three years of consecutive premium payments, these policies have a surrender value.

4. Loan Against Shares and Mutual Funds

Mutual funds are also a good way to generate long-term wealth and can also be used as collateral for a loan. You can receive a loan from a financial organization by pledging equity or hybrid money. If you were searching for how many types of loan are there, loans against shares is also a type.

To take a loan against your mutual funds or shares, you must write to your bank and execute a loan agreement. Following that, the mutual fund registrar will write to your lender to lodge a lien on the stated number of units to be pledged. 

You can often borrow 60-70% of the value of the pledged units. Similarly, when a loan is accepted, financial institutions establish a lien on the shares, with the loan value equal to a percentage of the value of the shares.

5. Loan Against Fixed Deposit

Fixed deposits (FDs) are sums of money deposited in banks for a set period of time, on which you can earn interest. You can use the amount in FDs as security to procure a loan.

The loan amount could range from 70-90% of the FD's value, depending on the lender. It's vital to remember that the loan can't last longer than the FD’s maturity period.

For example, if your FD is worth approximately or more than Rs.1,00,000, you can apply for a Rs.80,000 loan. The interest rate on such types of loans is higher than the interest rate you earn on your FD.

6. Gold Loan

Gold has long been considered one of the most popular options in moments of need. A gold loan requires you to put up gold jewelry or coins as collateral. This form of loan is based on a percentage of the gold’s pledged worth. 

As Indians have a lot of idle gold, this is one of the most popular secured loans for urgent need of funds. Gold loans are frequently used for short-term purposes and have a short payback period when compared to housing loans and loans against property.

7. Vehicle Loans

A vehicle loan is a two- or four-wheeler loan that helps you buy the vehicle of your dreams. For the purchase of a new or used vehicle, auto loans are available. The loan amount is determined by your credit score, debt-to-income ratio, loan duration, price of vehicle, etc.

A good credit score is favorable when applying for a vehicle loan because credit reports are used to establish loan eligibility. Your loan application will be swiftly approved, and you may be eligible for a lower interest rate. 

The vehicle you purchase acts as the collateral in this type of loan. If you default from paying EMIs on time, your vehicle may be claimed by the lender to mitigate the loan.

The following documents are required for vehicle loans:

• Aadhar card, voter's card, and PAN card
• Statement from the bank
• Proof of income
• Proof of continuity of Employment/Business
• 2 passport-size photos
• Identity Verification
• Proof of address
• Form-16

Types of Unsecured Loans

An unsecured loan is a type of loan where you don’t need to pledge any asset or collateral. Lenders decide your creditworthiness based on your repayment history, credit score, etc.

These loans can be used by lenders to pay for a wide variety of reasons. In India, however, these types of loans carry a higher interest rate than conventional loans. 

The various types of unsecured loans are listed below.

1. Personal Loan

A personal loan is one of the most prevalent sort of unsecured loans for quick cash. Because they are unsecured, they have a higher interest rate than secured loans. If you have a good credit score and a steady income, you can acquire this loan at a low-interest rate.

Personal loans can be used for a variety of purposes, including the following:

• Wedding expenses
• Travel or holidays
• Home renovation, improvement project, or buying furniture
• Investing in your child's higher education
• Paying credit card or utility bills
• Debt consolidation or paying all ongoing loans through one loan
• Medical emergencies
• Unforeseen/unexpected/urgent expenses

All banks offer personal loans to their customers. Apart from banks, there are many instant loan apps that cater to people who need urgent funds.

Lower interest rates, increased liquidity, and speedier disbursements have all contributed to the increase in personal loan applications. The following documents are required for personal loans-

• KYC papers including Aadhar card, driver's license, and voter's card
• Proof of income
• Your savings and checking account statements.
• A duplicate copy of your tax return
• Form-16

2. Loan on Credit Card

Credit cards have become a popular way to pay for products that you buy. They even come in handy while you are travelling abroad. As they also help in improving credit score, many people choose to use credit cards to pay for utility bills and other monthly expenses.

While using a credit card, you need to be responsible about paying your outstanding bills at the end of each month. On failing to do so your credit score can take a hit and you might also get stuck in debt trap.

If you do not pay your credit card bills on time, interest will accrue and you may find it harder to manage your money as your outstanding balance rises. 

3. Loans for Small Business

Small or medium-sized firms can take out loans to help them run their business smoothly. They can use the funds as working capital, to upgrade their equipment, paying staff wages, consolidating business debt, etc.

The age and experience of the business owner, the number of years the business has been in existence, income tax returns, all decide the amount, tenure, and interest rate of such loans.

4. Education Loans

The country's demand for education loans has increased as a result of the increased demand for higher education from respected schools and colleges. This form of loan covers the cost of the course's basic tuition as well as any additional costs such as lodging, test fees, and so on. 

The student is the primary borrower on this loan, with co-applicants including parents, siblings, and spouses. But if a student is underage, the guardian, sibling, or friend can act as the main borrower.

An education loan can be used to pay for a full-time, part-time, or vocational course, as well as graduate and post-graduate courses. The student must repay the amount once the course is completed. 

A distinctive feature of an education loan is the moratorium period. During the moratorium period, the student can defer payment of the EMIs until 12 months following completion of the degree or six months after commencing work, whichever comes first.

5. Payday Loan

Payday loans can be considered types of advances. They are mostly for small amounts and have a short tenure, but come with high interest rates. 

Payday loans are especially for people who are salaried. Proof of income like salary slips, Form-16, credit score, and credit history are considered before approving this loan. 

Taking a loan is a great way to meet life goals without blowing off your savings. If planned properly, they can build your credit score and won’t be a burden on you. 

Secured loans are a good choice if you have assets to pledge, and are looking for bigger amounts of money. They also get approved easily and have lower interest rates as compared to unsecured loans.

If you need urgent funds for a short term goal, you can opt for Moneyview personal loans. You can get loan amounts from Rs.5,000 to Rs.10 Lakh depending on your eligibility criteria, and the funds get disbursed within 24 hours, in most cases. To know more, download the Moneyview app or check out our Moneyview website.