Generally speaking, loans fall into two categories: secured and unsecured loans, depending on whether or not collateral is needed. Collateral is needed for secured loans, but not for unsecured ones. There is a list of loan products in each of these two categories, and each product has a distinct function. It's important to comprehend the characteristics of the various loan kinds that are offered in India so that you may choose wisely when submitting an application for financing.
Different Types of Loans Available in India
Loans can be divided into two primary groups according to the security offered:
1. Secured Loan
A secured loan is one for which collateral must be pledged. Home loans would be a good example of a secured loan. Your home serves as security for the lender in the event of a home loan. Should you fail to make loan payments, the lender is entitled to take your belongings in order to recoup the outstanding balance.
Thanks to the collateral, secured loans typically have lower interest rates than unsecured loans.
2. Unsecured Loan
A loan for which you are not required to provide collateral is known as an unsecured loan. The factors that determine your creditworthiness—income, ability to repay debt, and credit score—account for determining your loan eligibility and interest rate. One of the best examples of an unsecured loan would be a personal loan or cash loan.
Because there is less collateral involved, there are greater risks associated with unsecured loans, which could result in interest rates that are somewhat higher than for secured loans.
Different Types of Secured Loans in India
1. Loan for a house
Secured loans, such as home loans, are used to buy real estate. In India, there are several kinds of home loans that can be obtained, including loans for the acquisition of land, loans for home construction, loans for home renovation, etc.
2. Mortgage in Gold
Loans secured by gold coins, jewellery, or bullion are known as gold loans. In order to receive money according to the relevant loan-to-value guidelines, the borrower guarantees gold jewellery to the lender. The interest rates on gold loans may be less than those on personal loans.
3. Mortgage secured by real estate
A secured loan approved against a pledged piece of property is known as a loan against property, or LAP. There are no end-use limits on the LAP amount, so you can use it for any kind of financial need.
4. Take Out Loans Against Insurance Contracts
A loan against an insurance policy may be secured by specific kinds of life insurance policies, such as regular and endowment plans. Up to 90% of the policy's surrender value, not the total amount promised, could be lent, with interest rates determined by the bank using its one-year MCLR rate.
5. Loan secured by shares and mutual funds
As collateral for loans, shares and mutual funds may also be pledged. Lenders may approve loans for up to 85% of qualifying debt funds and up to 65% of the NAV of eligible shares and equity funds. Although the loan funds are flexible, they cannot be redeemed until the loan is fully repaid. This also applies to shares or fund units that have been pledged. Nevertheless, interest would still be earned on the shares and unpledged fund units based on performance.
6. Financed by PF/EPF
A loan could be obtained against your Provident Fund (PF) account if you have one. No additional interest would be assessed on these loans since they are regarded as premature withdrawals. But subject to limits and regulations, early PF withdrawal is only permitted for specific predetermined circumstances such as a medical emergency, a home purchase, a wedding, unemployment, etc.
7. Fixed-deposit loans
You can borrow money using your fixed deposit as collateral by applying for a loan against it. Depending on your bank's policies, you may be able to borrow a portion of the entire deposit amount—typically between 90 and 95 percent. For such a loan, the interest rate typically exceeds the appropriate FD rate by up to 2%.
8. Auto Loan
Automobile loans, which enable you to finance your ideal automobile, motorcycle, or electric vehicle, are typically secured loans. The automobile in question serves as security for the loan.
9. Vehicle Lending
Automobile loans are a viable option if you intend to buy an automobile. Depending on their terms and conditions, lenders may lend up to 85% of the car's ex-showroom price. Nevertheless, there are two further categories of auto loans: used and new.
10. Two-wheeler Credit
To buy the motorbike or scooter of your choosing, you can choose to apply for two-wheeler loans. With the vehicle being pledged as security, you can obtain up to 85% financing of the two-wheeler's on-road worth as a loan.
Different Types of Unsecured Loans in India
1. Individual Debt
Unsecured personal loans are available for any kind of financial need, including emergency situations, home improvements, wedding expenses, and vacation funds. Applicants with a high credit score and pre-approved clients can obtain personal loans at the best possible rates.
2. Money Advance
Though qualifying applicants can obtain a cash loan using the lender's mobile application in a completely paperless manner in a matter of minutes, it is comparable to a personal loan. They have no constraints on how they are utilised in the end and can be used for any purpose, much like personal loans.
3. Student Debt
Higher education can be funded via education loans, both domestically and internationally. These include living expenses such as housing and other living costs that students must pay while enrolled in classes, in addition to the tuition fees of the educational institutions. Though most student loans are unsecured, some applications for large loans may require collateral or a guarantee before being approved by the lender.
4. Farm Credit
For a variety of farming-related tasks, agricultural loans are offered. Farmer assistance programmes are provided nationwide by financial institutions.
5. Infinite Credit
Under a flexible loan, the borrower might take out a fixed amount of credit and only pay interest on the portion that is actually utilised.
6. Credit Card Debt Claims
Credit card loans are connected to the account of the cardholder and may or may not be connected to the credit limit of the card. The monthly credit card cost is usually combined with the loan repayment EMIs. Although these loans can be obtained fast with no paperwork and utilised for any kind of financial need, the interest rates on them are usually far higher than those on personal loans. They ought to be applied sparingly and only as a final resort.
7. Quick Loans for Businesses
Unsecured loans meant to cover daily costs or diversify a company, organisation, or entity are known as short-term business loans.
8. Payday Loan
Payday loans are quick loans that are usually given at a higher interest rate by a lender. Typically, they have smaller ticket sizes. Compared to personal loans, payday loans often have a shorter term.
9. Credit Card
Even if their account balance is zero, qualified consumers can use a bank overdraft to take out cash or complete approved transactions up to a prepayment limit. Not the whole overdraft limit, just the utilised portion is subject to interest charges. Unsecured lending possibilities include insurance plans and overdrafts against federal deposits, though.
Loan alternatives abound, but each has advantages and disadvantages of its own. It is crucial to analyse several loan choices in order to choose the ones that best fit your particular financing needs and create a shortlist of them. Make sure you compare loan offers from several lenders once you've decided on your ideal loan kind. Above all, make sure you never take out more than you can afford to repay. If you don't, your credit score could suffer, you could even lose the valuable item that was pledged as collateral.