A loan is a very common word nowadays because of its familiarity in one way or another. You or your family may have applied for a loan in the past. It may be for the house you are living in or for a bike you are riding etc. There are various types of bank loans available in India and I am going to talk about the same in today’s article. This is a very common yet extremely important topic from the exam point of view. You can expect questions from this topic in the upcoming banking examinations like SEBI GRADE A, NABARD Grade A, SBI PO, and IBPS PO, etc. Therefore, in this article, I am going to explain the types of loans in detail. It is advised to make proper notes and to revise it on a regular basis in order to gain a grip over this topic.
- 1 Definition of a Loan:
- 1.1 Types of Loans:
- 1.2 Secured loans:
- 1.3 Unsecured loans
Definition of a Loan:
In a common language, a loan is a specified amount of money borrowed with an assurance to return it back in an agreed period of time. The lender is usually a bank. The bank or a lender levies a specified rate of interest on the amount borrowed. The borrower then repays the amount along with the interest in installments.
Types of Loans:
There are various types of loans available in India. Based on the loans available they are classified into two types.
1. Secured Loans
2. Unsecured Loans
The loans that require collateral are termed as secured loans. The term collateral means you have to provide some assets to the lender as a security against the money you are borrowing. If by any means you fail to repay it in the given amount of time, the bank will get the money from the asset you provided to them. In secured loans, the rate of interest is comparatively lower than the unsecured loans.
Types of Secured loans
Home loan is a type of secured loan. If you wish to build your own house, you can apply for this loan. Banks provide funds to build or buy a home. It charges a certain amount of interest on the loan. The rate of interest charged also depends on your credit score which gets evaluated by the bank at the time of sanctioning your loan. People generally take home loans when they purchase a new home or land for home but home loans are also available for renovation of home or for under-construction home etc. The time period on this type of loan is around 20 to 30 years depending on the amount of loan taken and the interest payable on it. Please note that while buying a new home or property, the bank asks you to make a down payment of at least 10-20% of the property’s value.
Loan against property (LAP)
Loan against property is one of the secured loans where the borrower pledges any residential, commercial or industrial property for receiving the funds required to him. The loan amount sanctioned is equivalent to a certain percentage of the value of the property. The percentage varies with the lenders. While some lenders may offer around half of the property’s value, others may offer an 80% value of the same property. People generally take this type of loan for the higher education of their children or to open a new business etc.
A gold loan is a type of secured loan in which as collateral you have to pledge gold jewelry or gold coins. The loan amount sanctioned against the jewelry or coin is a certain percentage of the gold’s value. The amount sanctioned against the gold depends on the lender. Gold loans are generally used for short-term needs and the repayment term of the loans is generally shorter than the home loans or LAP.
Loans against fixed deposits
You can also take out a loan against the fixed deposit. FD comes handy when you need a loan. The amount of loan sanctioned against the fixed deposit can vary between 70-90% of the value of the fixed deposit. It also varies across the lenders. However, please note that the term of the loan cannot be more than the FD’s tenure.
These types of loans do not require collateral. To avail unsecured loans all that is required is your credit score history and associations of the past. To avail unsecured loans without a hassle you need to have a good credit score. The rate of interest charged in the unsecured loans is higher than the secured loans due to the lack of collateral.
Types of Unsecured loan
Personal loan is one of the most popular and common types of unsecured loans. The rate of interest rates payable in personal loans is higher compared to secured loans since a personal loan is an unsecured loan. If you have a stable income as well as a good credit score there are high chances of you to avail of this loan at a competitive rate of interest. People take personal loans for various purposes some of them are: for expenses of a family wedding, for a vacation or an international trip, to finance home renovation projects, for a child’s higher education, to meet unexpected or urgent expenses along with many other reasons.
Short-term business loans
A short-term business loan is another type of unsecured loan which is used by various entities and organizations to meet their daily expenses in the business. As the name suggests it is used for small enterprises or businesses. The expenses can be working capital loans, Machinery loans and equipment finance, Small business loans for MSMEs, Loans for women entrepreneurs, and Loans for traders along with other loans meant for business’ purposes.
Education loans are basically taken for higher education and are very popular among students. This type of loan covers the basic fees of the course along with other expenses such as the accommodation (Hostel fee), exam fee, etc. In this type of loan, the student is the main borrower of the loan while the parents, siblings and spouse are co-applicants. An education loan can be a full-time, part-time or vocational course along with graduation and post-graduation courses in various fields like management, engineering, and medicine, among others.
A vehicle loan is a type of unsecured loan given for buying two or four-wheeled vehicles. Vehicle loans are provided either for the purchase of a new vehicle or for a used one. Before providing a loan your credit score will be evaluated by the bank and the loan will be sanctioned after that. The loan tenure and past history are also some factors in sanctioning loan for the vehicle.
So this was it for the types of loans that are available in India. For other topics on banking awareness please click on the links provided below. You can attempt free full-length mock tests for various competitive examinations like SEBI Grade A, SSC CGL, NABARD Grade A and many more.