2 min read
25 May 2021

A loan is essentially money borrowed with a promise of return within a specific period/ tenor. The lender decides a fixed rate of interest that you must pay on the money you borrow, along with the principal amount borrowed. Here are different types of loans available in India.

Types of loans

There are various types of loans available in India, and they are classified into two factors based on the purpose they are used for:

  • Secured loans
  • Unsecured loans

Secured loans

The loans that require collateral are the ones where you have to pledge an asset as security for the money you are borrowing to the lender. That way, if you cannot repay the loan, the lender still has some means to get back their money. The rate of interest of secured loans tends to be lower as compared to those for loans without collateral.

Additional Read: 4 top factors that led to the growth of NBFCs in India

Types of secured loans

1. Home loan

Home loans are a secured mode of finance that give you the funds to buy or build the home of your choice. The following are the types of home loans available in India:

  • Land purchase loan: To purchase land for your new home
  • Home construction loan: To build a new home
  • Home loan balance transfer: Transfer the balance of your existing home loan at a lower interest rate
  • Top up loan: Can be used to renovate an existing home or have the latest interiors for your new home

Note that while buying a new property/ home, the lender requires you to make a down payment of at least 10-20% of the property's value. The rest is financed. The loan amount disbursed depends on your income, its stability and current liabilities, among others.

Must Read: What is loan account number (LAN)

2. Loan against property (LAP)

A loan against property is one of the most common forms of a secured loan. You can pledge any residential, commercial or industrial property to avail of the funds required. The loan amount disbursed is equivalent to a certain percentage of the property's value and varies across lenders.

While some lenders may offer an amount equivalent to 50-60% of the property's value, others may offer an amount close to 80%. A loan against property helps you unlock the dormant value of your asset and can be used to satiate personal life goals such as higher education of children or marriage. Businesses use a loan against property for business expansion, R&D and product development, among others.

3. Loans against insurance policies

Yes, you can also avail of loans against your insurance policy. However, note that all insurance policies don't qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value, can avail loans.

Thus, you can't avail of a loan against a term insurance plan as it doesn't have any maturity benefits. Also, loans can't be availed against unit-linked plans as the returns aren't fixed and depend on the market's performance. It's essential to note that you can opt for a loan against endowment and money-back policies only after they've acquired a surrender value. These policies gain a surrender value only after paying regular premiums continuously for three years.

4. Gold loans

For the longest time, gold has been one of the most favoured asset classes. The organised Indian gold loan industry is expected to touch Rs. 3,101 billion by 2019-20, according to a KPMG report, thanks to flexible interest rates offered by financial institutions.

A gold loan requires you to pledge gold jewellery or coins as collateral. The loan amount sanctioned is a certain percentage of the gold's value pledged. Gold loans are generally used for short-term needs and have a short repayment tenor compared to home loans and loan against property.

5. Loans against mutual funds and shares

Mutual funds can also be pledged as collateral for a loan, an ideal vehicle for long-term wealth creation. You can pledge equity or hybrid funds to the financial institution for availing of a loan. For doing so, you need to write to your financier and execute a loan agreement.

Your financier then will write to the mutual fund registrar and put a lien on the specific number of units to be pledged. Typically, you can get 60-70% of the value of units pledged as a loan.

Similarly, financial institutions create a lien against shares for which the loan is taken, and the loan value is equivalent to a percentage of the value of the shares.

6. Loans against fixed deposits

A fixed deposit not only offers assured returns but can also come in handy when you need a loan. The loan amount can vary between 70-90% of the FD's value and varies across lenders. However, it's essential to note that the loan tenor can't be more than the FD's tenor.

Additional Read: What is annual percentage rate (APR)

Unsecured loans

These are loans that do not require collateral. The lender gives you the money based on past associations, your credit score and history. Thus, you have to have a good credit history to avail of these loans. Unsecured loans usually come at a higher rate of interest due to the lack of collateral.

Types of unsecured loan

1. Personal loan

A personal loan is one of the most popular types of unsecured loans that offer instant liquidity. However, since a personal loan is an unsecured mode of finance, the interest rates are higher than secured loans. A good credit score and high and stable income ensure you can avail this loan at a competitive interest rate. Personal loans can be used for the following purposes:

  • Manage all expenses of a family wedding
  • Pay for a vacation or an international trip
  • Finance your home renovation project
  • Fund the cost of your child's higher education
  • Consolidate all your debts into a single loan
  • Meet unexpected/ unplanned/ urgent expenses

Additional Read: Know the difference between simple interest Vs compound interest

2. Short-term business loans

Another type of unsecured loans, a short-term business loan, can be used to meet various entities and organisations' expansion and daily expenses.

  • Working capital loans
  • Machinery loans and equipment finance
  • Small business loans for MSMEs
  • Loans for women entrepreneurs
  • Loans for traders
  • Loans for manufacturers
  • Loans for service enterprises

Flexi Loans

With a Flexi loan, you can avail of funds from your approved limit and, whenever required and pay interest only once the amount is used. You can withdraw on your loan limit any number of times and prepay when you have extra cash at no additional cost. Such a unique facility gives you the freedom to fully control your finances, unlike rigid term loans and offers you savings on your EMIs by up to 45%. Here, you also have the option to pay only interest as EMIs, with the principal payable at the end of the tenor.

Education loans

Aspiration for higher education from reputed institutions have bolstered the demand for education loans in the country. This loan covers the course's basic fees and allied expenses such as accommodation, exam fee, etc. In this loan, the student is the primary borrower while parents, siblings and spouse are co-applicants.

An education loan can be taken for a full-time, part-time or vocational course, along with graduation and post-graduation courses in management, engineering, and medicine. The student must repay the loan once the course is complete.

A unique feature of an education loan is the moratorium period, wherein the student has the option of not paying the EMIs until after 12 months of completing the course or six months after he/ she starts working, whichever is earlier.

Vehicle loans

A vehicle loan is extended in the form of a two or four-wheeler loan that helps you buy your dream vehicle. Vehicle loans are offered either on the purchase of a new vehicle or a used one. Your credit score, the ratio of debt to income, loan tenor, etc., play a crucial role in determining the loan amount.

With Bajaj Finserv, you can get pre-approved offers on all the loans mentioned above, and there are no queues, forms or details needed. Here, your loan offer is already approved so that you can avail of instant financing. All you need to do is provide some basic information and get your pre-approved offer.
 

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