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The different types of loans available in India

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  • The different types of loans available in India

    A loan is essentially money borrowed with a promise of return within a specific time period/tenor. The lender decides a fixed rate of interest that you must pay on the money you borrow, along with the principal amount borrowed. Let us take a look at the different types of loans that are available in India.
    Types of loans

    There are various types of loans available in India, and they are classified based on two factors:
    - Whether they require collateral
    - The purpose they are used for

    Based on whether they require collateral, loans are classified into secured loans and unsecured loans. Let’s take a look at each type.

    I. Secured loans These are loans that do require collateral, i.e., you have to provide an asset to the lender as security for the money you are borrowing. That way, if you are unable to repay the loan, the lender still has some means to get back their money. The rate of interest of secured loans tends to be lower as compared to those for loans without collateral.

    Types of secured loans

    1. Home loan

    Home loans are a secured mode of finance, that give you the funds to buy or build the home of your choice. The following are the type of home loans available in India:
    Land purchase loan: Purchase land for your new home
    Home construction loan: 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 while buying a new property/home, the lender requires you 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)

    Loan against property is one of the most common forms of a secured loan where you can pledge any residential, commercial or industrial property for availing the funds required. The loan amount disbursed is equivalent to a certain percentage of the property’s value and varies across lenders.

    While 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 of 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 loans against your insurance policy. However, note that all insurance policies don’t qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value can be used to avail loans.

    Thus, you can’t avail a loan against a term insurance plan as it doesn’t have any maturity benefits. Also, loans can’t be availed against unit-linked plans as the returns aren’t fixed and depends on the performance of the market. It’s essential to note that you can opt for a loan against endowment and money back policies only after they’ve acquired a surrender value. These policies acquire a surrender value only after paying regular premiums continuously for 3 years.

    4. Gold loans

    For the longest time, gold has been one of the most favored asset classes. The organized Indian gold loan industry is expected to touch Rs.3,101 billion by 2019-20, according to a KPMG report, thanks to flexible interest rates offered by financial institutions.

    A gold loan requires you to pledge gold jewelry 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 tenor compared to home loans and loan against property.

    5. Loans against mutual funds and shares

    An ideal vehicle for long-term wealth creation, mutual funds can also be pledged as collateral for a loan. You can pledge equity or hybrid funds to the financial institution for availing a loan. For doing so, you need to write to your financier and execute a loan agreement.

    Your financier then will write to the mutual fund registrar and a lien on the certain number of units to be pledged is marked. Typically, you can get 60-70% of the value of units pledged as a loan.

    Similarly, with shares, financial institutions create a lien against shares against 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

    The humble fixed deposit not only offers assured returns but can also come handy when you need a loan. The amount of loan can vary between 70-90% of the FD’s value and varies across lenders. However, it’s essential to note that the loan tenor can’t be more than the FD’s tenor. II. Unsecured loans

    These are loans that do not require collateral. The lender lends you the money based on past associations, and your credit score and history. Thus, you have to have a good credit history to avail these loans. Unsecured loans usually come at a higher rate of interest due to the lack of collateral. Types of unsecured loan

    1. Personal loan

    Offering an instant flush of liquidity, a personal loan is one of the most popular types of unsecured loans. However, since a personal loan is an unsecured mode of finance, the interest rates are higher compared to secured loans. A good credit score along with high and stable income ensures you can avail this loan at a competitive rate of interest. Personal loans can be used for the following purposes-
    - 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 loans, a short-term business loan can be used to meet their expansion and daily expenses by various entities and organizations.
    - 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

    Flexi Loans

    A facility whereby you can avail funds from your approved limit and as when required and pay interest only on the amount used. You can withdraw on your loan limit, any number of times and prepay when you have extra cash, at no extra cost. Such a unique facility gives you the freedom to be in full control of your finances unlike rigid term loans and offers you savings on your EMIs by up to 45%. Here, you also have the option to pay only interest as EMIs, with the principal payable at the end of the tenor.

    Based on what they are used for, loans are classified mainly into:

    1. Education loans

    Aspiration for higher education from reputed institutions have bolstered the demand for education loans in the country. This loan covers the basic fees of the course along with allied expenses such as the accommodation, exam fee, etc. In this loan, the student is the main borrower while parents, siblings and spouse are co-applicants.

    An education loan can be taken for a full-time, part-time or vocational course along with graduation and post-graduation course in the fields of management, engineering and medicine, among others. The loan must repaid by the student once the course is complete.

    A unique feature of an education loan is the moratorium period, wherein the student has the option of not paying the EMIs until after 12 months of completing the course or 6 months after he/she starts working, whichever is earlier.

    2. Vehicle loans

    A vehicle loan is extended in the form of a two or four-wheeler loan which helps you to buy your dream vehicle. Vehicle loans are offered either on purchase of a new vehicle or a used one. Your credit score, ratio of debt to income, loan tenor, etc., play a crucial role in determining the loan amount.