Loans can be broadly categorised into secured and unsecured loans based on whether they require collateral or not. Secured loans are loans that require collateral whereas unsecured loans are loans that do not require collateral. 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 creditline.
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 loan. In case of a home loan, your house acts as a security to it. lender. In case you default on your loan, the lender holds the right to seize your property to recover the loan.
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.
Generally, interest rates for unsecured loans are higher than secured loans because of the higher risks involved.
Here are some of the secured loans available in India.
Home loans are secured loans that are primarily 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. The borrower pledges gold ornaments to the lender in exchange for funds. Gold loan interest rates are lower than personal loans.
A loan against property or LAP is a secured loan sanctioned against a property pledged as a collateral. The LAP loan amount doesn’t have any end-use restrictions, meaning, you can use the amount for any financial requirement.
It is also possible to avail of loans against your insurance policies. However, not all insurance policies qualify for loans. You need to check with your policy provider to understand whether the facility is available.
Mutual funds and shares can be pledged as collateral in exchange for funds. When a loan is requested against the shares, it is given equivalent to the value of the shares.
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 withdrawal and no additional interest rate would be charged. However, there are several terms and conditions attached to loan against EPF.
A loan against FD is a type of loan where you can secure funds using your fixed deposit account as collateral. You can borrow a certain percentage of the total deposit amount, typically up to 70%-95% of the deposit, depending on your bank’s policies. The interest rate on such loans is 1%-2% above the FD rate..
Vehicle loans are usually secured loans that help you finance your dream vehicle like car, bike or electronic vehicle. The concerned vehicle works as collateral against your loan.
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.
You can opt for two-wheeler loans to purchase a bike/scooter of your choice. You can get up to 100% financing of the value of the bike or two-wheeler, wherein the vehicle is pledged as collateral.
Now that we have discussed types of secured loans, let’s understand the types of unsecured loans offered in India.
Personal loans are unsecured loans that help you meet any kind of financial requirements. You can use the fund to fund your vacation, renovate your house, pay your bills, etc.
A cash loan is similar to a personal loan. Such loans are an effective solution for cash crunches. The eligibility for cash loans entirely depends on your creditworthiness.
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. Education loans come in both secured and unsecured variants, with collateral or guarantor required for high-value loans.
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 facility wherein the borrower avails of a certain amount and pays interest only for the amount used.
These loans should really only be considered when there are no other alternative ways to meet urgent financial requirements. That’s because credit card loans come with high interest rates..
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.
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.
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.
Ans: Banks check an individual’s credit score to judge their credit worthiness. 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 on your downpayment size, liquid assets and loan tenure.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: Yes, you can take a cash loan to meet immediate business funding requirements. Alternatively, you also can apply for a business loan.
Ans: 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.
Ans: 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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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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