Different Types of Loans Available In India: Which One Do You Need

Loans can be classified based on whether they require collateral or not and the purpose for which they are used. Secured loans are loans that require collateral, whereas unsecured loans are the type of loans that do not require the applicant to attach collateral. The below section would give you a brief idea on the different types of loans offered by financial institutions in India.

Types of Loans Available in India Based on Security?

Based on the security provided, loans can be classified into two categories:

1. Secured Loans

Secured loan refers to loans where you have to pledge collateral. It can be the house against which you have taken a loan, gold for loans against gold, your car against which you have taken a loan for, etc. 

For secured loans, these assets act as a security against which you take the loan. Generally, secured loans have lower interest rates than unsecured loans. 

This is primarily because your asset is at stake, meaning if you default on your loan, the lender has every right to seize the asset. 

Unsecured Loans

Personal loan is the best example for unsecured loans. In case of unsecured loans, you don’t have to pledge collateral. 

The lender gives you a loan after considering multiple factors including your credit history, monthly income and repayment capacity. 

The interest rate for unsecured loans is generally on the higher side. 

Different Types of Loans In India Based on Purpose and Use

1. Personal Loan

2. Home Loan

3. Education Loan

4. Vehicle Loan

5. Car

6. Two-wheeler

7. Flexi Loan

8. Business Loan

9. Gold Loan

10. Mortgage Loan

11. Loan against Insurance Policies

12. Loan against Mutual Funds & Shares

13. Credit Card Loan

14. Agriculture Loan

15. Payday Loan

1. Home Loans

Home loans are secured loans that provide you with funds to finance your house or property. There are different types of home loans available in India, namely land purchase loans, home construction loans, top-up loans, etc. 

2. Personal Loans

Personal loans are unsecured loans that help you meet any kind of financial requirements. You can use the fund to finance your vacation, renovate your house, pay your bills, etc. The interest rates of personal loans are generally higher than secured loans.

3. Gold Loans

Gold has always been one of the most favoured and safest assets. Gold loans are loans secured against gold ornaments. The borrower pledges gold ornaments to the lender in exchange for funds.

4. Loans against Mutual funds and Shares

Mutual funds and shares can also be submitted as collateral in exchange for funds. When a loan is requested against the shares, it is given equivalent to the value of the shares.

5. Loans against Insurance Policies

It is also possible to avail of loans against your insurance policies. However, not all insurance policies qualify for loans.

6. Short-term Business Loans

Short-term business loans are a type of unsecured loans which are useful for meeting the daily expenses or diversification of the businesses, organisations or entities.

7. Flexi Loans

A flexi loan is a facility wherein the borrower avails of a certain amount and pays interest only for the amount used.

8. Education Loans

Education loans are loans availed of by students who aspire for higher education but cannot meet the steep expenses. This loan covers the fees of the course along with the other expenses such as accommodation, exam fees, etc.

9. Vehicle Loans

Vehicle loans are usually secured loans that help you finance your dream vehicle. You can further sub-classify these to car loans, bike loans and two-wheeler loans.

10. Car Loans

If you’re planning to purchase a car, you can opt for car loans. Some lenders offer up to 100% financing of the car’s value. These can be further sub-classified to used and new car loans.

11. Two-wheeler Loans

Planning to purchase the latest scooty or bike? You can opt for two-wheeler loans. Most lenders offer up to 100% financing of the value of the bike or two-wheeler.

12. Mortgage Loans

Mortgage loans are secured by the entity you take a loan from. This loan works well if you want to invest in your dream home or any real estate.

13. Credit Card Loans

These loans should really only be considered when there are no other alternative ways to meet urgent financial requirements. You can avail of a loan from your credit card company but these loans can have extremely high-interest rates.  

14. Agricultural Loans

Agricultural loans are available for different kinds of farming-related activities. Financial institutions offer monetary aid to farmers all across the country.

15. Payday Loans

A payday loan is a short-time loan with a smaller ticket-size, wherein the lender gives the loan at a higher rate of interest. The tenure of payday loans is generally shorter than personal loans.

Also Read: Unsecured Loans In India: Different Types Of Unsecured Loans Available

Features and Benefits of Loans

The features and benefits of borrowing money from lending institutions are as follows:

• Leading financial institutions like banks and NBFCs in India offer various types of loans based on purpose and securities.
• As a borrower, you will have full power to choose the type of loan you want to apply for based on your needs and eligibility. 
• You will have to pay an interest rate and repay the loan amount plus the interest within a given tenure.
• The loan repayments are divided into easy-to-pay instalments called EMI (Equated Monthly Instalment). Borrowers must pay this amount on a fixed day every month over the loan’s tenure.
• The lending institution will determine whether the borrower must pledge any security.
• Lenders will have the final say in the money they want to lend a particular applicant. This decision is based on factors like the applicant’s income, repayment capacity, CIBIL score, etc. 
• In some types of loans, financial institutions ask for a third-party guarantee instead of security.
• Some lending institutions may ask the borrower to pay a set penalty for prepayment of the loan.
• Lending institutions may or may not levy additional charges and fees for borrowing, like processing fees.  

Documents Required for Loans

The documents that are required to be submitted vary from lender to lender and loan to loan. However, we have mentioned a few common documents that are asked by most lenders.

Salaried

• Identity Proof: PAN, Aadhaar, ration card, voter id, driving licence, passport, etc.
• Address Proof: Aadhaar, passport, voter id, ration card, etc
• Income proof: Last 3 months’ salary slips
• Employment Proof: Company ID, offer letter

Self-employed

• Identity Proof: PAN, Aadhaar, ration card, voter id, driving licence, passport, etc.
• Address Proof: Aadhaar, passport, voter id, ration card, etc
• Income Proof: Last 6 months’ bank statements, last 2 years’ IT returns
• Business Proof: Trade licence, sales tax certificate, etc
• Other Documents: Sole Proprietorship Declaration or Certified Copy of the Partnership Deed, certified true copy of the Memorandum & Articles of Association (certified by the company Director) and Board Resolution 

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Eligibility Criteria for Availing Different Types of Loans in India

There are certain basic parameters that have to be fulfilled to secure the different types of loans in India:

Age Criteria	The minimum age limit to apply for the different types of loans is 18 years, whereas the maximum age is 65 years.
Occupation Criteria	You have to be a salaried employee or a self-employed individual to avail the different types of loans.
Income Level	The income levels vary based on both the type of loan and the moneylender.
Credit Score	The minimum credit score that is required to avail of any type of loan is 650+

Tax Benefits on Different Loan Types

Although loans can strain one’s financial health, they can essentially come with numerous tax benefits. Different loans offer different types of tax saving schemes on them. Loans that offer tax savings schemes are as follows:

1. Tax Benefits on Housing Loan

Loans taken for the purchase of residential properties are liable for tax deductions under section 80C of the Income Tax Act. It states that individuals can obtain deductions up to Rs. 1.5 lakhs on principal amounts of housing loans. The deduction, however, requires that construction for the residential property has been completed. 

Section 24 of the Income Tax Act states that interest on home loans is also liable to tax deductions (up to Rs. 2 lakhs) on the condition that construction of the housing property must be completed before 3 years from the end of the financial year when the loan was approved. Else, the deduction amount is Rs. 30,000. Loans taken for repair or renovation of an existing property carry a maximum tax deduction of Rs. 30,000 per financial year. 

2. Tax Benefits on Education Loan

Section 80E of the Income Tax Act states that a citizen can avail of tax deductions on the interest paid for education loans for a maximum of 8 years. Remember that deductions for one education loan apply for the interest amount alone and not on the principal amount for 8 years or earlier.

3. Tax Benefits on Personal Loan

Personal loans provided by banks or financial institutions are liable for tax deductions on the interest payments and not on the principal amount. If that loan is taken for renovation or construction of the residential property, it is liable for tax deductions of up to Rs. 2 lakhs under section 24B. 

4. Tax Benefits on Vehicle Loan

Normally tax exemptions on the purchase of automobiles can be availed if done via a home loan. However, self-employed individuals can enjoy tax deductions from the payable business taxes. For that, the individual must purchase the vehicle in the name of his/her business enterprise. 

Also Read: What Is A Small Business Loan? Benefits, Types And Other Features

Final Word

Now that you know of the different types of loans in India, apply for the loan you need. However, always compare the interest rates offered by different lenders before applying for any loan. This would help you make an informed decision.

FAQs on Different Types of Loans

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article. 

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