Different Types of Loans
To meet various needs of individuals, banks and other financial institutions have come up with varied loans and advances. Loans help us achieve many of our goals which might be difficult to do just with our savings. Right from buying an electronic gadget to building a company, loans can help us do all of that.
Loans can be availed from banks or any other financial institution. Loans can be categorized into 2 categories based on the requirement of collateral.
- Secured Loans (Do not require collateral to avail of the loan)
- Unsecured Loans (Require collateral to be provided to avail of the loan)
Different Types of Secured Loans and their Features
Any loan that is availed on the basis of collateral can be called as a secured loan. To avail a secured loan, the borrower would have to offer an asset as collateral. If the borrower is unable to repay the loan, the collateral is taken over by the bank.
General features of a Secured Loan
- The asset purchased by the loan remains pledged to the lender till the time loan is not repaid.
- In case the loan is not repaid, then the borrower will lose the asset.
- Payment of anywhere between 10-25% of the value of the asset is required to be paid as down-payment to avail the loan.
- As the loan is secured against the asset, the rate of interest for secured loans is lesser.
- Some of the secured loans may have a lesser credit score requirement, as the loan is secured against an asset.
Some of the secured loans that are available to consumers are:
Home loans are one of the most popular loans availed against the security of an asset. The home being purchased is offered as a security for the loan. Home loans are big-ticket long term loans running into lakhs of rupees. Due to the nature of the loan, high credit score and a good track record of managing credit in the past is required.You can purchase a ready to move-in property, under-construction property or even buy a piece of land and construct your home with a home loan.
- A home loan is also popular for the income tax benefits that it brings.
- You could avail a home loan from banks or housing finance companies.
Four- Wheeler or Car Loans
These are loans that cater to your requirement of buying a four-wheeler. These days four-wheelers come with a lot of unique features making the cost of buying a car quite high. So, car loans come in to make good the need for funds. The four-wheeler that is purchased out of this loan will remain hypothecated to the bank till the time the loan is repaid in full.
- The tenure of four-wheeler loans can go up to 5-7 years.
- Loans are available for new as well as second-hand four-wheelers.
- You could avail of a four-wheeler loan from banks, Non-banking financial companies, or even use a personal loan to buy a four-wheeler.
Two-Wheeler (Bike) Loans
Just like a four-wheeler loan, a two-wheeler loan helps you to buy a two-wheeler of your choice. Owning a personal vehicle often becomes a necessity because of its convenience. By availing of a two-wheeler loan, you can buy your two-wheeler without waiting and saving up for the required amount. The tenure of two-wheeler loans can be anywhere between 2-5 years. Similar to a four-wheeler, a two-wheeler availed on a two-wheeler loan needs to be hypothecated to the financier till the time the loan is repaid in full.
- Two-wheeler loans can be availed from banks or non-banking financial companies.
- As two-wheelers do not cost much, you could also use a personal loan to buy your two-wheeler.
Loan Against Property
While the loans mentioned above were availed to buy an asset like a home or a vehicle, loans can also be availed by pledging the assets already held by you. A loan against property is one such loan. Here, you pledge your existing property to avail of a loan. The amount of such a loan can be utilized for any purpose, like starting off a business, down payment of another loan, marriage or education, etc. Many factors like the condition of the property, market value, and the title of the property are considered before fixing the loan amount. Lenders always ensure they keep 20-40% of the value of the property as a margin. So, depending upon other factors, only 60-80% of the property value may be available as a loan.
The tenure of a loan against property can go up to 20 years.
A loan can be availed against gold held by you in the form of ornaments, gold coins or gold bars. These can be pledged to avail a loan. The gold pledged is assessed and then a loan to the tune of 60-80% is made available to the borrower. The gold remains in the safe custody of the bank/lending institution until the payment of the loan. As the loan is available against the value of a pledged asset, the borrower need not have a high credit score. The loan may be available even to those with no credit score. In fact, availing a small gold loan with prompt repayment can be a great way to build up your credit score.
- Gold loans are available from banks and non-banking financial companies
- The tenure of the loan is 12 months.
Loan Against Shares, Insurance Policies or Mutual Funds
Mutual funds, shares, and some insurance policies are all investments of some sort. These investments can be pledged to get a loan. The loan value is restricted to a certain percentage of the value of the investment depending upon the policies of the lender and the market value of the investment. The investments will be assigned to the bank/financial institution, which means that you will not be able to sell these investments until the loan is cleared. But the best part is your investment will continue to gain value even if it remains assigned to the lender.
Loan Against Rent Receivables
If you own a residential or a commercial property, the future rent of the property can be pledged to avail of a loan. There are some conditions that will have to be met to avail a loan against rent receivables. They are - a valid rental agreement, the creditworthiness of both the borrower and the tenant, and that the property is built in accordance with a government-approved plan. To avail a loan against rent receivables, you would need to enter into a tripartite agreement with the bank, your tenant and yourself saying that the tenant will pay the rent directly to the bank till the period of the loan.
- This loan is available from many banks and NBFCs.
- The tenure of the loan against rent receivable is restricted to the remaining tenure of the lease rental.
Loan Against Fixed Deposits
A fixed deposit is also another kind of investment where the money is invested for a certain period of time. Fixed deposits could be used as collateral or security to avail of a loan. The loan amount is limited to a certain value of the fixed deposit provided as security. The FD will continue to earn interest during the time it remains pledged with the bank. But you won’t be able to close the FD before repaying the loan.
- The tenure of the loan is restricted to the term of the Fixed Deposit.
- Loan against a FD can be availed from banks or NBFCs.
This is a kind of loan that is availed by the business owners. Manufacturers go in for this kind of loan when they buy machinery against a loan. The equipment bought out of the loan remains pledged with the bank till the loan is repaid. Equipment financing loans can be availed from banks or NBFCs. The procedure for availing of this loan is slightly different as it involves verification of business financials and the creditworthiness of both the borrower and the business.
The different kinds of unsecured loans available to consumers are
Personal loans are one of the widely availed loans as it can be used for any reason. It could meet emergency needs or could meet any expense for which you fall short of cash. The processing time involved in a personal loan is lesser in comparison to other loans like home loans or vehicle loans. You could also avail personal loans online from the comfort of your own home or office. Based on your requirement, a personal loan can range anywhere between a few thousand to a few lakh of rupees. If you are looking to avail a personal loan, you could do so from online fintech lenders, banks, NBFCs, Cooperative Banks or Peer to Peer lenders. The interest rate charged by each of the lenders will be different based on their lending policies.
Credit Card Loans
Credit cards are very useful instruments for payment and even for managing personal budgets when used wisely. Every credit card has a billing cycle. All the amount spent on the card at the end of the billing cycle will have to be paid back by the payment date. If any amount remains unpaid, it is charged an interest which could be anywhere between 36-48% p.a as per the terms and conditions of the card.
PayDay loans are a new type of loans that have gained popularity recently. These loans are ultra short term in nature, often availed for a tenure of 7- 30 days and have to be paid back in full on the day of your salary along with the interest.
- These loans are processed in no time and are available even to those with bad credit.
- But, the interest charged on PayDay loans is higher than even the interest charged on Credit Cards.
A credit line is a credit limit approved for you based on your income, employment status and credit history. In a credit line, you will be approved a maximum credit limit. You could spend any amount within the approved limit and pay interest only on the used amount. But you may be required to pay a certain amount of fee to keep the credit limit.
- Credit line loans can be availed only through some online lenders.
Small Business Loans
Small business loans are offered exclusively for small businesses which are in the start-up phase. These loans are offered without collateral or pledging any business assets. These loans could be used as working capital to pay salaries, maintain inventory, meet day-to-day running expenses like office expenses, etc. To avail these loans you would need to provide details of your business along with business financials and a copy of the audited financial statements. Good credit score of the promoters of the business may also be a requirement.
- Small business loans could be availed from banks, online lenders or NBFCs.
Your credit card has the ability to act as an ATM card. When in emergencies, you can use a credit card to withdraw money. These are called Cash Advances. Any money withdrawn from a Credit card will be charged interest from the time of withdrawal till the time it is repaid.
- In addition, a Cash Advance Fee will also be payable on these advances.
An education loan specifically caters to the needs of funding for education. This loan could be both secured and unsecured. An education loan could be availed for pursuing higher education in India or abroad. The need of providing collateral for an education loan depends on the course you intend to pursue, the institution that you are looking at, and the amount being availed as a loan. You need a co-borrower to avail of an education loan, so the creditworthiness of the co-borrower also matters.