Loans can be broadly categorised into secured and unsecured loans based on whether they require collateral or not. Secured loans require collateral whereas unsecured loans do not. Each of these two categories has a list of loan products listed with each product serving a specific purpose. It’s better to understand the features of different types of loans available in India so you can make an informed decision while applying for a financing facility.
In this blog, we have curated a list of different types of loans in India.
Based on the security provided, loans can be classified into two main categories:
Secured loan refers to loans where you have to pledge collateral. A prime example of secured loans would be home loans. In the case of a home loan, your house acts as a security to the lender. In case you default on your loan, the lender holds the right to seize your property to recover the loan dues.
Generally, secured loans have lower interest rates than unsecured loans because of the collateral involved.
An unsecured loan is a loan where you don’t have to pledge collateral. Your loan eligibility and interest rate is decided based on your creditworthiness – your income, repayment capacity and credit score. A cash loan or personal loan would be the best example for unsecured loans.
Interest rates for unsecured loans could be slightly higher than secured loans because of the higher risks involved due to the absence of collateral.
Home loans are secured loans that are utilised to purchase land or property. There are different types of home loans available in India, namely land purchase loans, home construction loans, home improvement loans, etc.
Gold loans are loans secured against gold ornaments or coins or bullion. The borrower pledges gold ornaments to the lender in exchange for funds as per the applicable loan-to-value norms. Gold loan interest rates could be lower than personal loans.
A loan against property or LAP is a secured loan sanctioned against a property pledged as collateral. The LAP amount doesn’t have any end-use restrictions, meaning, you can use the amount for any financial requirement.
Certain types of life insurance policies like endowment plans and traditional policies could qualify as security for a loan against an insurance policy. The maximum loan amount could be up to 90% of the policy’s surrender value (not its sum assured), and banks could charge an interest rate based on their 1-year MCLR rate.
Mutual funds and shares can also be pledged as collateral in exchange for funds. Lenders could sanction up to 65% of the NAV of eligible shares and equity funds, and up to 85% of eligible debt funds as a loan. The loan funds could be used for any purpose; however, the pledged shares or fund units cannot be redeemed unless the loan is cleared in full. That said, the unpledged fund units and shares would continue earning interest as per performance.
If you have a Provident Fund (PF) account, it is possible to get a loan against your PF account. Such loans are considered as a premature withdrawals and no additional interest rate would be charged. However, premature PF withdrawal is only allowed for certain predefined requirements like medical emergency, home purchase, wedding, unemployment, etc. subject to terms and conditions.
A loan against FD is a type of loan where you can secure funds using your fixed deposit as collateral. You can borrow a certain percentage of the total deposit amount, typically up to 90-95% of the deposit, depending on your bank’s policies. The interest rate on such a loan is usually up to 2% higher than the applicable FD rate.
Vehicle loans are usually secured loans that help you finance your dream vehicle like a car, bike or electric vehicle. The concerned vehicle works as collateral against your loan.
If you’re planning to purchase a car, you can opt for car loans. Lenders could offer up to 85% of the car’s ex-showroom price as a loan as per their terms and conditions. That said, car loans could further be classified as new car loans and used car loans.
You can opt for two-wheeler loans to purchase a motorcycle or a scooter of your choice. You can get up to 85% financing of the on-road value of the two-wheeler as a loan, wherein the vehicle would be pledged as collateral.
Personal loans are unsecured loans that can be used to meet any type of financial requirement – from emergencies and home renovation to fund a vacation or wedding. Pre-approved customers and applicants with stable income and high credit score can get personal loans at the lowest applicable rates.
A cash loan is similar to a personal loan; however, eligible applicants can get such a loan in a few minutes through the lender’s mobile application in a 100% paperless process. They too, like personal loans, can be used for any requirement with no end-usage restrictions whatsoever.
Education loans are used to fund higher education in India or abroad. They cover not just the tuition fees of the educational institutions but also the accommodation and other living expenses borne by the students during the course of study. But while education loans are typically unsecured in nature, lenders could ask for collateral or guarantor to approve certain education loan applications involving high loan quantum.
Agricultural loans are available for different kinds of farming-related activities. Financial institutions offer monetary aid to farmers all across the country.
A flexi loan is a financing facility wherein the borrower avails of a certain amount and pays interest only for the amount used.
Loans on credit card are linked to a user’s credit card account that may or may not be linked to the card’s credit limit. The loan repayment EMIs are typically clubbed with the card’s monthly bill. While these loans could be availed of quickly involving zero paperwork and used for any financial requirement, their interest rates are typically much higher than personal loan rates. Thus, they should be used only as a last option and for as low an amount as possible.
Short-term business loans are unsecured loans that are useful for meeting the daily expenses or diversification of a business, organisation or entity.
A payday loan is a short-time loan typically 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.
A bank overdraft allows eligible customers to withdraw money or make eligible transactions up to a predefined limit even if their account balance is zero. The interest is charged only on the utlised overdraft amount and not the entire overdraft limit. However, certain types like overdraft against FD and insurance policies are considered secured loan options.
|Criterion||Secured Loans||Unsecured Loans|
|Collateral requirement||Required||Not required|
|Interest rates||Could be relatively lower than unsecured loans||Could be relatively higher than secured loans|
|End-usage restrictions||Usually restricted (like in a home loan, car loan, etc.) but exemptions there (like loan against FD, gold loan, loan against property, loan against mutual fund, etc.)||Usually no restrictions except an unsecured education loan|
|Maximum loan amount||Usually a percentage of the security||Depending on loan type and applicant’s income and credit score among other eligibility factors|
|Credit score impact||Medium to low||Very High|
|Secured Loans||1. Lower applicable interest rates|
2. Better option if your credit score is low
3. Can be approved quickly depending on loan type and lender
|1. Loan amount linked to value of collateral|
2. Risk of losing collateral if unable to repay loan
|Unsecured Loans||1. No need to worry about collateral|
2. High loan quantum for eligible applicants
3. Can be approved quickly if credit score is high
|1. Typically higher interest rates than secured loans|
2. Credit score could be severely impacted if unable to repay loan
Although there’s no dearth of loan options, each comes with its own set of pros and cons. That’s why it’s very important to compare multiple loan options so that you could shortlist the options that best meet your unique financing requirements. Also, ensure you check loan offers from multiple lenders after finalising your preferred loan instrument. Most importantly, ensure you never overborrow and repay your loan in full on time to avoid additional charges, credit score damage and potential loss of a precious asset pledged as collateral.
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Banks check an individual’s credit score to judge their creditworthiness. Poor credit scores are liable to be rejected because of the higher potency of default. Banks may also require information about your income, employment history, debt-to-income ratio and/or collateral value. Financial institutions may also require knowledge of your downpayment size, liquid assets and loan tenure.
2021 onwards, the maximum loan limit has been increased from Rs. 25 lakhs to Rs. 5 crores. However, RBI rules that Rs. 5 crores is the upper limit and the individual accepting the loan should be scrutinised and approved of.
Certain banks and financial institutions providing the loans may allow multiple co-borrowers depending on the loan type and the financial/credit history of the borrowers. An individual can add up to 6 people as co-borrowers of a home loan. This includes close relatives like parents, siblings, etc.
In India, loans are classified into secured and unsecured ones. A few examples of secured loans are home loans, gold loans, loans against property, loans against insurance policies, etc. Examples of unsecured loans include personal loans, cash loans, credit card loans, etc.
Yes, you can take a cash loan to meet immediate business funding requirements. Alternatively, you also can apply for a business loan online.
Yes, non-salaried or self-employed applicants are eligible for personal loans, home loans, etc. However, some lenders may have different eligibility criteria for self-employed applicants.
Yes, The Government of India has several schemes in place to provide financial assistance to farmers. These include Kisan Credit Card, Pradhan Mantri Fasal Bima Yojana, and Pradhan Mantri Kisan Samman Nidhi among others.
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