Different Types of Loans and their Features
A loan is simply a sum of money borrowed with the promise of repayment over a specified time period (tenor). The lender establishes a fixed interest rate that you must pay on both the principal and the borrowed funds.
The many types of loans available in India are listed here. Loans can be used for a multitude of things in today's world. Loans can be used to start a business, support a college degree, purchase a home, or purchase appliances for your new home.
What are the Various Types of Loans Available in India?
There are numerous types of loans available in India. Despite the fact that they have a variety of assets that they might mortgage to obtain loans with lower interest rates, most customers choose a personal loan over other options. This could be due to the ease of access and quick disbursement of personal loans.
There are various types of loans available in India, which are split into two groups based on the purpose of the loan:
What are the Types of Secured Loans?
Let us know what a secured loan is first.
A secured loan must be backed by collateral worth at least as much as the loan amount. The collateral assets serve as a lender's right that can be forfeited if the borrower defaults on the loan. These loans feature a lower interest rate as compared to unsecured loans.
Given below are different types of secured loans.
1. Home Loans
Home loans are a sort of secured financing that can be used to buy or build the home of your dreams. These loans are usually for a longer period (20 years to 30 years). The interest rates on home loans offered by several of India's biggest banks start at 8.30%.
The lender will check your credit score before approving your loan request. If you have a decent credit score, there's a good possibility you'll be able to get a house loan with cheaper 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 home
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 the most modern interior design for a new home
It should be mentioned that when purchasing a new property/home, 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, stability, and responsibilities.
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 varies by lender and is based on a percentage of the property's value.
Some lenders will lend 50-60% of the property's value, while others would 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.
A loan against property is 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 secured by your insurance policy. 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 because they can be used as collateral for a loan. You can receive a loan from a financial organization by pledging equity or hybrid money. To do so, 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 percent 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 a type of loan that offers guaranteed returns and can be used as collateral. The loan amount could range from 70 to 90 percent of the FD's value, depending on the lender. It's vital to remember that the loan can't last longer than the FD.
If you have a bank account, you can acquire a loan against a fixed deposit. If your FD is worth approximately or more than INR 100,000, you can apply for an INR 80,000 loan. The interest rate on such a loan is higher than the interest rate on your FD, which is paid by the bank.
6. Gold Loan
Gold has long been considered one of the most popular investment options. The organized Indian gold loan market is expected to reach 4.61 lakh crore by 2022, according to a KPMG forecast, thanks to financial institutions' flexible interest rates.
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. Gold loans are frequently used for short-term purposes and have a short payback period when compared to housing loans and loans against property.
What are the Types of Unsecured Loans?
First, let us learn what an unsecured loan is.
Financial organizations offer numerous sorts of loans without collateral based on a variety of factors such as the borrower's repayment history, credit score, and other factors.
These loans can be used by lenders to pay for a wide range of activities and cover unforeseen needs without breaking the bank. In India, however, these forms 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 sorts 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:
Organizing all of the expenses that come with a family wedding
Paying for a vacation or a trip to another country
Spending money on a home improvement project
Investing in your child's further education
Taking out a single loan to pay off all of your bills
The number of people seeking personal loans to suit diverse needs has increased considerably during the previous decade. Unsecured loans surged by roughly 27%, or four times the rate of bank lending, notably between 2015 and 2018.
Lower interest rates increased liquidity, and speedier disbursements have all contributed to the increase in borrowing. The following documents are required for personal loans:
KYC papers including Aadhar cards, driver's license, and voter's cards.
Proof of income is necessary for self-employed professionals.
Your savings and checking account statements.
A duplicate copy of your tax return
2. Loan on Credit Card
When you use a credit card, you should be aware that you will be responsible for all of your transactions at the conclusion of the monthly cycle. Even when traveling abroad, credit cards are accepted practically everywhere. It has become a popular loan kind because it is one of the most convenient ways to pay for the products you buy.
A credit card can be applied online. These cards come with a lot of perks and rewards. You must repay the loan on time, but you will be richly rewarded for doing so. Obviously, there are risks involved with taking out this form of a loan. You must be aware that the amounts you borrow on your credit card are subject to a high rate of interest.
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. However, if you use your credit card correctly and pay off all of your debts on time, it might be your best friend in your wallet.
3. Vehicle Loans
A vehicle loan is a two- or four-wheeler loan that helps you buy the car of your dreams. For the purchase of a new or used vehicle, car loans are available. The loan amount is determined by your credit score, debt-to-income ratio, loan duration, and other considerations.
Obtaining a vehicle loan may assist you in bridging the gap between your desire for a car and the actual purchase of one. 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. Collateral is used to secure car loans.
If you don't pay your installments, your vehicle will be repossessed and the loan will be collected.
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
Proof of address
4. Loans for Small Business
Small company loans are loans given to small and medium-sized firms to help them satisfy a variety of needs. These loans can be utilized for a variety of things that will help the company flourish.
Purchase of equipment, purchasing goods, paying staff wages, marketing expenses, paying off business debts, meeting administrative expenses, or even opening a new branch or acquiring a franchise are just a few examples.
The age of the business owner, the number of years the business has been in existence, income tax returns, and a statement of the previous year's turnover that has been audited by a Chartered Accountant are all frequent eligibility criteria for small business loans (CA).
5. 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.
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 which 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.