types of loans in India

Know the Different Types Of Loans Available In India

June 25, 2022 • 188 views

A loan is an amount borrowed for a set time. The borrower must repay the interest computed on the borrowed principal amount. In today's world, loans may serve various purposes. For example, it can support a start-up or acquire appliances for a newly purchased house. Let us discuss the types of loans available in the market and the features that make these loans valuable to customers.

Different Types of Loans in India

1.    Secured loans

Secured loans necessitate the provision of an asset as collateral for the loan. The assets protect the lender's interests if the borrower fails to repay the loans. Compared to unsecured loans, secured loans have a lower interest rate.

a.    Home Loans:

A Home Loan might be beneficial if you plan to buy a property for yourself and your family. These loans often have longer terms (20 years to 30 years). Some of India's leading lending institutions provide Home Loans starting at 8.30 per cent or even lower.
The lender checks your credit score before approving your loan request. If you have an excellent credit score, there is a significant possibility that you will be able to get a Home Loan with reduced interest rates.
Home Loans help purchase new homes and land, improve or extend your current home, under-construction residences, etc.

b.    Loan Against Property

These loans allow you to mortgage your home to obtain capital for your business or personal needs. To get this loan, you must possess a residential or commercial property with a market value worth 60-70 per cent of the loan amount. However, don't forget to negotiate with the lender's representative to get the best price for your home.

c.    Loan Against Securities

You can capitalise on your investments by pledging them as collateral to borrow money for personal or corporate purposes. You can pledge investments such as stocks, mutual funds, etc. Advantages of selecting a loan against securities include:

  • Pledge a wide range of permitted assets such as shares, mutual funds, bonds, and other securities to acquire a loan of around 70% of the units pledged. 
  • Benefit from many repayment choices and no prepayment charges by choosing a loan against stocks.

d.    Car Loans:

A Car Loan is available for the personal vehicle loan that you want to purchase. For this type of loan, the purchased car acts as collateral. The lender possesses the right to take your vehicle if you default on your payments. Throughout the loan, the debt repayment occurs in predetermined instalments. The lender keeps possession of the asset until you make the last payment, similar to a mortgage.
Consider using an auto loan calculator first to determine what interest rate and loan duration would best suit your needs before going to the dealership.

Also Read: How Young Entrepreneur Can Utilize Business Loans Effectively?

2.    Unsecured loans 

Financial organizations provide several unsecured loans without collateral, depending on variables such as the borrower’s credit score, repayment history, etc. Lenders may use these loans to finance various expenses and deal with crises without breaking a sweat. However, these loans have a higher interest rate than ordinary loans. A prevalent example of an unsecured loan is a Personal Loan in India. Some of the unsecured loans include:

a.    Personal Loans

Poonawalla Fincorp offers Personal Loans to their customers to pay a bill or buy a new television. These are often unsecured loans. Before granting the Personal Loan amount in India, the lending institution requires various documents such as proof of income, assets, etc.
To repay the loan, the borrower should have sufficient assets or income. In the case of Personal Loans, the registration is only one or two pages long. Within a couple of days, the borrower learns whether the loan has been denied or approved. Remember that the interest rates on these loans might be relatively higher.
These loans have a short repayment time. So, if you borrow a large amount, it may be impossible to return without appropriate financial preparation. On the other hand, Personal Loans may be beneficial when you need to borrow a modest amount of money and repay it quickly.

b.    Small Business Loans

Small Business Loans are given to small and medium-sized firms to help them fulfil their different business needs. These loans can serve several objectives that aid in business growth. Some of them may include the acquisition of equipment, the purchase of goods, the payment of staff wages, marketing expenditures, the repayment of business debts, administrative fees, or even the establishment of a new branch or franchise.
The company owner's age, the years the firm has been operating, income tax returns, and a statement of the previous year’s turnover that a CA has already verified are standard qualifying requirements for small Business Loans.

c.    Wedding Loan

In India, weddings are typically vast and expensive affairs. You can use a wedding loan for your marriage and make it one to remember. You’re also possibly in a good financial position to cover the wedding expenses. However, you may need to loosen your purse strings from time to time due to various small charges. In this instance, a revolving loan may be the best option for dealing with little or infrequent needs.

d.    Vacation Loan

 A client may choose to fund an entire vacation with a term loan. You can use a loan to cover recurring or variable expenses such as food, shopping, leisure, etc.  Many people also have a credit card that may be used anywhere in the world for any currency denomination.

Conclusion

Banking firms and lending institutions approve secured and unsecured loans for several uses. Timely repayment of all loans is the key to maintaining good financial health. Before applying for different types of loans in India, examine the benefits and drawbacks of secured and unsecured loans.

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