Different Types of Loans Available in India

Loans serve as a financial tool that enables individuals or organisations to borrow money and repay it over time with interest. There are different types of loans designed to meet varied financial needs—such as personal, business, home, and education loans. Understanding each type of loan helps borrowers make informed decisions and select the most suitable option based on their financial goals and repayment capacity. 

✅  Check your pre-approved personal loan offer with phone number and OTP → Apply online in 5 minutes → Receive funds within a day*.

A loan is a credit that you have borrowed from an 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 timeframe.

Loans are broadly classified into two main categories based on whether they require collateral or not: secured loans and unsecured loans. Each category serves different financial needs and comes with distinct advantages and disadvantages.

Loans are classified into two factors based on the purpose that they are used for:

• Secured loans

• Unsecured loans

  
  

Secured loans

Secured loans are ones that require collateral where you have to pledge an asset as security whilst 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 compared to those for loans without collateral.

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.

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. 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 whilst 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.

Whilst 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. You can opt for a loan against endowment and money-back policies only after they have acquired a surrender value, which typically happens 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 was projected to reach Rs. 3,101 billion by 2019-20, as per a KPMG report, supported by flexible interest rates offered by banks and NBFCs.

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 will then 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. This makes it an excellent option for accessing funds without breaking your investment.

Additional Read: What is the annual percentage rate (APR)

7. Vehicle Loans

Vehicle loans are designed for purchasing cars, bikes, or commercial vehicles. The vehicle itself serves as collateral, making this a secured loan. Borrowers enjoy flexible tenures and competitive interest rates, depending on their credit score and loan terms.

8. Loan Against Securities

A loan against securities allows borrowers to pledge investments such as shares, mutual funds, or fixed deposits as collateral. This enables access to funds without liquidating assets. Interest rates are usually lower, and repayment terms are flexible.

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.

The money obtained from this loan can be used for any immediate or unexpected purposes. You must pay it back according to the terms set forth by the lender, just like any other loan. Applying for a personal loan from Bajaj Finance is simple and easy and it requires minimal paperwork.

Check your eligibility for personal loan using just mobile number and OTP – 100% online process. 

Personal loans can be used for:

- 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. These include:

• 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

  
  

3. 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. Many banks and NBFCs offer education loans with competitive rates and manageable repayment schedules.

4. Credit Cards

Credit cards offer a revolving line of credit for various expenses, from daily purchases to emergencies. They are unsecured and come with a fixed credit limit and interest rates. Responsible usage helps build credit scores and provides convenient access to short-term credit.

Which type of loan is the cheapest?

The cost of a loan can vary based on factors such as your credit score, income, and overall eligibility. Among the different types of loans, secured loans are usually more affordable since they are backed by collateral and come with lower interest rates. In contrast, unsecured loan types generally carry higher rates due to the absence of collateral.

However, when applying for a personal loan, borrowers should look beyond just the interest rate. It's important to also consider aspects such as:

• The approval process and speed
• Documentation requirements
• Stamp duty and registration costs
• Other associated charges (processing fees, prepayment penalties)
• Flexibility in repayment options

To make a well-informed financial decision, evaluate the total cost of borrowing rather than just the interest rate.

What are Flexi Loans?

Innovative loan option: With a Flexi loan, you can avail of funds from your approved limit and withdraw the amount whenever required, paying interest only on the amount you have withdrawn.

You can withdraw on your loan limit any number of times and part-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.

Key benefits of Flexi Loans:

• Interest charged only on withdrawn amount
• Multiple withdrawals without additional fees
• Part-prepayment without penalties
• Flexible EMI options
• Day-wise interest calculation
• Complete financial control