Loans provide financial assistance by allowing individuals or entities to borrow a sum of money that must be repaid with interest over a specified period, helping to fulfil various personal or business needs.
What is a loan?
A loan is a credit that you have borrowed from the NBFC or bank with a promise of returning it within a specific period. The lender decides on a fixed rate of interest, which you have to pay along with the principal amount within a specific period. Here are different types of loans available in India.
Different types of loans
Loans are classified into two factors based on the purpose that they are used for:
- Secured loans
- Unsecured loans
Additional read: Difference Between Secured and Unsecured Loans
Secured loans
Secured loans are the ones that require collateral where you have to pledge an asset as security while borrowing from 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 on secured loans tends to be lower as compared to those for loans without collateral.
What are the types of secured loans?
1.Home loan
Home loans are a secured mode of finance that gives you the funds to buy or build the home of your choice. You can apply online for a home loan at lower interest rates at Bajaj Finance. 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.
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 for 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 do not qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value, can avail of loans.
Thus, you cannot avail of a loan against a term insurance plan as it does not have any maturity benefits. Also, loans cannot be availed against unit-linked plans as the returns are not fixed and depend on the market's performance. It is essential to note that you can opt for a loan against endowment and money-back policies only after they have 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 tenure compared to home loans and loans 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 is essential to note that the loan tenure cannot be more than the FD's tenure.
Additional Read: What is the 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 interest rate due to the lack of collateral.
What are the 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 of this loan at a competitive personal loan 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
2. Short-term business loans
Another type of unsecured loan, 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
Education loans
Education loans provide financial assistance for higher studies, covering tuition fees, accommodation, and related expenses. These loans are offered with flexible repayment options and moratorium periods to support students during their education.
Additional read: Personal Loan for Higher Education
Which type of loan is the cheapest?
Depending on your credit score, income, and other eligibility requirements, the affordability of a loan may change. Secured loans are typically a more affordable choice as they are backed by collateral and have lower interest rates than unsecured loans. Unsecured loans lack any form of collateral security, which results in higher interest rates. But, the interest rate should not be the sole consideration when applying for a personal loan. The loan approval process, documentation, stamp duty, and other factors should also be considered while applying for a loan.
What are Flexi Loans?
With a Flexi loan, you can avail of funds from your approved limit and, withdraw the amount whenever required and pay interest only on the amount you have utilised. 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 Term Loans, Flexi Personal Loans offer 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 tenure.
