Oct 06 • 6 mins read
13 Different Types of Loans You Should Know
The simplest definition of a loan is an amount (money) borrowed for a fixed period. The borrow amount needs to be paid back in a pre-determined time frame. Until you pay it back, an interest is added to the amount you have to pay back. There are several different types of loans available in India and you can apply for them based on your needs.
Loans in India all serve one purpose, and that is to help you purchase something that you need. They are a great way to fund planned or unplanned expenses – such as buying a house or car, getting married, starting a business, education, and many other purposes. That’s why it’s so important to understand the different types of loans available in the country.
All loans are subdivided into secured and unsecured loans, and then they are further categorized into different types based on the purpose they serve.
Types of Loan
Secured loans are loans that require some sort of collateral to be provided as security for the loan. Collateral can be anything from jewelry to real estate. If you don’t pay back the loan, the lender can take possession of the collateral that you pledged and sell it to recover its principal and interest debts.
The loan amount is based on the value of the security, and the interest rate is fixed. These types of loans are fixed-rate loans, and they are not adjustable.
The main advantage of these types of loans is that they are easy to get. The borrower just needs to provide proof of ownership for the property or item being pledged as collateral, which usually takes no more than a few minutes. The loan amount will also usually be lower than what you would have paid for a mortgage, which makes this type of loan an excellent way to get started without incurring too much cost.
Unsecured loans are the most common types of loan in India. The term “unsecured” refers to the lack of need for security or collateral to obtain these loans. In simple terms, this type of loan is given with no collateral, and you do not have to put your property or any other asset as security for the loan.
To avail of such loans, you have to be capable enough to pay back the loan without any difficulty. You can get an unsecured loan from a bank or another financial institution like a non-banking finance company (NBFC).
The interest rate on these loans ranges from 8% to 24% per annum, depending on the lender.
These loans help you in getting cash when you need it most. They’re especially useful if you need to buy a vehicle or pay off debts such as rent or electricity bills, or when you are in an emergency that requires quick cash.
Types of Secured Loans
A home loan is a type of financial product that is used to finance the purchase of real estate, such as an apartment complex or a house. The buyer pays back the loan with interest and monthly payments over time. The home buyer receives a mortgage for up to 90% of the property value. The rest of the amount is referred to as the down payment. These loans generally come with longer tenures, and the interest rates start at 8.30%.
There are various ways to apply for a home loan today. For example, government Housing Schemes in India offer loans that require a low down payment compared to conventional loans. Applicants with low credit scores should check with the agency if they are eligible to apply for an FHA loan.
Loans Against Property
A loan against property is a type of secured loan where the borrower agrees to use their home as collateral for the loan. A lender may accept a home mortgage as collateral for a loan, whether it is owner-occupied or investment property. The lender will then lend you the money you need, and you will pay them back by making regular payments on time. The amount of money you can borrow is limited by the value of your home.
In most cases, this type of loan has higher interest rates than others because you are using your house as collateral. However, these rates are still much lower than what you would pay with an unsecured loan (such as credit card debt), and they usually include tax benefits.
Loans Against Insurance Policies
Should you find yourself in a cash crunch, consider whether your insurance policies could be used as collateral for a loan. You never know if this could be your first step towards securing the funds you need to move forward with your financial goals.
A gold loan is a type of secured loan that you can get with the help of your gold. It is a good option for those who have their own gold and want to use it as collateral for a secured loan. These loans are generally used for short-term needs and come with a shorter repayment tenure when compared with other secured loans like home loans and loan against property.
You can use your mutual funds and shares as a way to borrow money. This allows you to take advantage of your investments, gain access to funds, and pursue some of your goals in life. By choosing a loan against these securities, you will gain access to many repayment choices and no prepayment charges.
Loans Against Fixed Deposits
Some banks may allow you to get a loan against your fixed deposits, and in most cases, the value would stay closer to your fixed deposit account. Banks understand that FDs are safe investments, so getting a loan against your fixed deposit won’t be a problem.
Types of Unsecured Loans
A personal loan is a short-term borrowing that you can use to cover expenses not covered by other types of loans. Personal loans are typically used when you need money for emergencies, such as paying medical bills or paying credit card debt, etc.
A personal loan may have low monthly payments, but it will have high-interest rates. The interest rates are set by the lender based on the amount of money being borrowed, the length of time for which it must be repaid and other factors. Having a good credit score can make it easier for you to get a personal loan.
Short-term Business Loans
Short-term business loans are available to businesses that are facing a temporary cash crunch. These loans come with a maximum term of one year and interest rates that are flexible and negotiable. They can be used to pay for working capital, such as inventory purchases or equipment purchases. Short-term business loans are usually unsecured and do not carry any collateral protection.
A flexi loan is an unsecured loan that allows you to get funds from your approved limit whenever you want them. There is no limit on the number of transactions you can do, which gives you the freedom to withdraw cash from your limit without any restrictions and at no extra cost. The interest on flexi loans should only be paid when the amount is used.
An education loan is a short-term, unsecured loan that can be used to finance the cost of higher education. An education loan can be taken out for any educational purpose, such as undergraduate, graduate or professional degree programs.
The reason why loans have become so popular is because they offer convenience and flexibility. You can use them for post-secondary school tuition, living expenses and other incidentals. The interest rate on these types of loans can range from 9% to 14%.
The basic idea behind vehicle financing is to make sure you have enough money to purchase a new or used vehicle. The amount a person can borrow is determined by their credit score, income and the interest rate that the lender has set. These loans have some of the highest interest rates and fees because they are considered unsecured, meaning that the bank holds no collateral to guarantee repayment.
Credit Card Loans
Credit cards are among the most convenient ways to pay for your purchases. They are accepted almost everywhere, even when you are travelling abroad. One of the most notable benefits is a great reward system that allows you to rack up points and miles on your purchases and redeem them for rewards or discounts on future trips. When you use a credit card, you’re basically borrowing money from your bank. Obviously, this type of loan has its drawbacks. You’ll have to pay back the full amount of your purchases at the end of each billing cycle, or else you can face serious financial problems.
You must understand that there are high-interest rates associated with credit card borrowing. If you do not pay your credit card bills on time, the interest will pile up and become a huge burden to your finances.
Consumer Durable Loans
As the name suggests, consumer durable loans can help you to purchase items such as electronic gadgets and household appliances. The amount you can borrow depends on the lender; it ranges from Rs.5,000 to Rs.5 lakh, with no security deposit required usually. Some lenders offer 0% interest with instant approval, minimal paperwork and no down payment required.
Tips For Choosing The Right Loan Type
- Assess your financial needs and repayment capacity before choosing a loan type.
- Compare interest rates and other terms and conditions offered by different lenders.
- Consider the loan amount, repayment term, and other fees and charges before making a decision.
- Check your credit score before applying for a loan to increase your chances of approval and lower interest rates.
Loans are an important resource that individuals can use to accomplish a variety of goals. Whether you want to buy a home, start a small business, or finance a new car, a loan can be an invaluable resource. Knowing the types of loans available to you in India will help you when you need funds that you haven’t budgeted for, so make sure you have the necessary information and stay prepared.