If you want to know the different types of loans, then you have hit the correct link. But before entering into the in-depth study of loan types, we must understand what is loan? In simple terms, the loan is an amount that a party borrows with a commitment of future payment of the entire principal value in addition to interest on the amount. Technically, a loan is a credit vehicle in which a party lends money to another party in reciprocity for future payment of the interest at a specific prescribed rate on the principal in addition to the principal balance.
Once you understand what is a loan, you must know the categories in which loans are broadly classified based on the purpose. There are two major types of loans: secured loans and unsecured loans; they are further sub-categorized.
What is a secured loan?
A secure loan is a loan in which the borrower requires collateral, an asset that one keeps for the loan. The asset safeguards the lender’s interest if the borrower fails to repay the loan amount. It has a lower interest rate as compared to an unsecured loan because it poses a lower risk to the lender.
Types of Secure Loans.
Home loan
It is the most common form of secure loan. It is taken against the purchase or construction of a house. Here the house itself works as collateral for the lender. Home loans are long-term loans, and the tenure could range between 10 years to 25 years while the interest rate ranges from around 7% to 7.5% per annum.
Gold loan
Gold is the most favored asset in India. It can be used as collateral for a loan, and the borrower pledges the gold with the lender and gets the loan while the lender retains the gold until the borrower repays the loan amount. The interest rate for gold loans begins from 7.5% per annum. Usually, the lender asks the borrower to pay interest on the loan amount each month. At any point, the borrower can repay the loan amount and take possession of the gold back.
Vehicle loan
Vehicle loans are loans taken to buy a vehicle. It could be a passenger vehicle or a commercial vehicle. Vehicle loan is available for all vehicles, including two-wheelers, four-wheelers, and heavy vehicles. Here the vehicle itself works as collateral. The percentage of interest ranges between 7 to 7.5%. Sometimes, the lender offers a 100% loan on the vehicle’s value.
Loan against property
The borrower raises the funds from the lender against any residential, commercial, or industrial property. Though the administration charges and the interest rate are higher for loans against property compared to home loans, the borrower can use the fund for any purpose. The interest rate starts from 8%, while the LTV lies between 65% to 70%.
Loans against fixed deposit
Here the borrower takes a loan against the fixed deposit, which acts as primary collateral. One can avail of a loan of around 60% to 75% of the fixed deposit amount as a loan against FD. Usually, all the lender parties implement flat interest rates, but few may charge 1% or 2% higher interest rates.
Loan against insurance
Most people buy insurance policies, but only some know they could act as collateral to keep against a loan. The condition is that the policy must bear the surrender value, which means that policies like endowment policies or money-back policies, which possess maturity value, can only help one avail of a loan. The interest rate falls between 10% to 12% per annum. The LTV lies between 85% to 90% per annum.
Loans against mutual funds and shares
One can get the loan by keeping mutual funds and shares as collateral to the financial institution. One can own a hybrid or equity fund with the lending party to raise funds against it. Still, for this, the borrower should write a letter to the financer, who will further report to the mutual fund registrar to put a specific number of units as mortgage against the loan, The LTV falls between 60% to 70% of the value of units kept in the lien.
The same procedure is done for loans against shares
What are unsecured loans
When borrowers raise the funds from the lender without pledging collateral, they are called unsecured loans. The borrower’s creditworthiness, which includes income, repayment capacity, and credit score, becomes the criteria for eligibility and interest rate of the loan. The interest rate for unsecured loans is a bit higher than secure loans as it involves higher risk due to the absence of collateral.
Types of unsecured loans
Personal loan
Personal loan offers instant liquidity for the borrower to manage any expense. For a personal loan, the financial institution asks certain documents like address proof, identity proof, and income proof to approve the loan. The borrower must possess considerable earnings and assets to repay the loan. The registration form for a personal loan consists of merely 1 or 2 pages, and the applicant gets to know about the approval or disapproval of the loan within 1-2 days of registration.
Education loan
The students who want to pursue quality education but find financial difficulty in bearing the fees can get education loans whose interest rates begin from 8.85% per annum. The loan’s repayment period begins after 12 months from the completion of education.
Small business loans
Small business loans are available for small and medium-sized businesses to support them in managing their business needs. These loans serve the purpose of business growth. The reason for acquiring the loan could be business expansion, marketing expenses, developing some new equipment or fixed assets, purchase of goods, administrative charges, or repayment of business debt. Documents such as owners’ identity and age, years of business establishment, IT returns, and previous year’s turnover statement verified by CA are required to qualify the criteria for small business loans.
Conclusion
From the above article, it is clear that multiple options exist to acquire a loan from a financial institution, but each kind of loan has its pros and cons. Therefore, one must analyze the loan requirement and match it with the type of loan to be taken. Make sure that you must not overborrow and should also repay the loan within the stipulated time to avoid any additional charges and to maintain your credit score.
