The Different Types of Loans Available in India

Loans are capital borrowed from a financial institution or a bank. They charge interest on the money lent for a certain period. For some, bank loans are a way to meet emergencies, while for others, loans act as a catalyst for growth. The purpose and the type of loan availed determine its impact. Various types of bank loans are available for borrowers in India. Here's an in-depth look at the loan types borrowers can access from lending institutions.

Different Kinds of Loans in India

Basically, loans in India are of two types – Secured and Unsecured. They are provided by banks and financial institutions.

Secured Loans

Secured loans are those loans that are provided against security. The borrowers need to furnish security for availing of secured loans. Lenders face a lower default risk by the borrower in secured loans. If the borrower is unable to repay the loan, the lender can sell the asset to recover its dues. That is why secured loans have a lower interest rate compared to unsecured loans.

Types of Secured Loans

Home Loans

Home loans are the most common type of secured loans availed by borrowers. These loans are taken for the purchase or construction of a home, with the home itself acting as security for the lender. Depending on the borrower's profile and the home's valuation, additional collateral security might be required. Home loans are long-term, usually spanning 10 to 25 years, with interest rates starting between 7% to 7.5% per annum. The loan-to-value (LTV) ratio is generally 80%, meaning borrowers can get a loan up to 80% of the property's value.

Gold Loans

Gold loans are secured by the gold owned by borrowers. Borrowers pledge their gold with the lender to receive money, and the lender retains possession of the gold until the loan is repaid. The interest rate for gold loans starts from 7.50% per annum. Typically, borrowers only pay the interest each month, with the principal repayable anytime to reclaim the gold. The LTV for gold loans can go up to 90%.

Vehicle Loans

Vehicle loans are taken for purchasing vehicles, including two-wheelers, four-wheelers, and commercial vehicles. The vehicle acts as security for the lender, who can seize it if the borrower defaults. Interest rates on vehicle loans start from 7% to 7.5% per annum. The LTV depends on the vehicle type, with some lenders offering up to 100% of the vehicle's value as a loan.

Loan Against Property

This type of loan allows borrowers to mortgage their property to access funds. It can be availed against both residential and commercial properties. The LTV for loans against property ranges from 65% to 70%. Interest rates are slightly higher compared to home loans, starting at 8% per annum.

Loan Against Securities

Investors can borrow money against shares, mutual funds, bonds, and debentures. Due to the volatile nature of securities, the LTV is capped at 50% of the security value. Interest rates for loans against securities start from 7.50% per annum.

Title Loans

In title loans, borrowers can use their vehicle as collateral to borrow up to 25% to 50% of the vehicle's value. While borrowers retain possession of the vehicle, the lender can seize it in case of default. These are short-term loans with high interest rates, often around 25% per month (300% per annum).

Non-recourse Loans

Non-recourse loans allow borrowers to provide collateral without personal liability for repayment. If the collateral does not cover the loan amount, the lender cannot pursue the borrower for the remaining balance. LTV ranges from 60% to 80%.

Loan Against Fixed Deposits

Borrowers can access loans against their fixed deposits, with an LTV of 60% to 75%. Interest rates on these loans are generally 1%-2% higher than the fixed deposit rate, making them an affordable option.

Loan Against Insurance

Borrowers can use life insurance policies with a surrender value as collateral. The LTV for loans against insurance ranges from 85% to 90%, with interest rates starting from 10% to 12% per annum.

Working Capital Loans

Working capital loans help businesses meet their operational needs. The loan amount depends on the business's working capital components, and interest rates start from 12% per annum. Collateral security might be required alongside stock and debtors.

Unsecured Loans

Unsecured loans are not backed by any collateral. These loans are provided based on the borrower's income, potential earning capacity, and credit history, increasing the lender's risk. Consequently, unsecured loans have higher interest rates.

Types of Unsecured Loans

Personal Loans

Personal loans are among the most popular unsecured loans in India. They are granted based on the borrower's income and credit score, with interest rates ranging from 8% to 10% per annum. Borrowers can use the funds for any purpose, including medical emergencies, education, travel, or asset purchases.

Short-term Business Loans

Businesses facing financial crunches can opt for short-term business loans to meet urgent needs. These loans have simple eligibility criteria and are disbursed based on the business's profitability and the borrower's profile. Interest rates range from 12% to 18% per annum.

Education Loans

With the rising cost of education, education loans provide necessary financial assistance. Interest rates start from 8.85% per annum, with repayment typically beginning 12 months after the completion of the course.

Credit Cards

Credit cards allow users to spend without immediate cash outflow and offer a grace period for repayment. Unpaid balances can be converted into loans, making them a form of unsecured borrowing. However, credit cards carry high interest rates, ranging from 18% to 36% per annum, and significantly impact the borrower's credit score.

Wrapping Up

Understanding the different types of loans available in India is crucial for making informed financial decisions. Whether you need funds for personal, business, or educational purposes, there's a loan type suited to your needs. Knowing the specifics of secured and unsecured loans, along with their associated interest rates and terms can help you choose the right loan and manage your finances effectively.