In India, loans serve as useful tools for individuals and businesses trying to reach financial goals. By borrowing a specific sum from a lender, you can access needed funds without depleting your savings.
There are different types of loans in India that address diverse financial needs. These range from secured loans, like home loans, to unsecured loans, such as personal and education loans. Each serves a unique purpose in financial planning and proving cash flow.
A loan is an amount of money you borrow from a bank or a Non-Banking Financial Company (NBFC), with an agreement to repay it over a set period. The initial borrowed capital is known as the principal amount.
You also have to pay interest, which compensates the lender for the risk. You pay the money back in regular installments over months or years. The affordability of the loan depends on loan terms set by the lender, based on the set norms, eligibility qualifications, and your credit history.
Lenders generally categorise loans into two kinds: secured loans and unsecured loans. Here is in-depth information to help you clearly understand the difference.
These loans are backed by collateral, such as real estate, precious metals, or other assets. This backing provides extra security to lenders, often resulting in lower interest rates and bigger borrowing amounts.
The following is a summary of different types of secured loans, their intended uses, who is able to get them, how long they last, and their interest rates.
A home loan helps you to buy, build, or remodel a house. The property secures the loan. Options include loans for buying land, building a home, transferring a current loan, and adding to an existing one.
These loans support salaried and self-employed people who have a steady income and a solid credit history. Payment schedules can last up to 30 years, and interest rates often begin at 7% and can reach 15% per year. The total loan can cover 80% to 90% of the property's value.
Loan against property lets people leverage their real estate, be it for housing, business, or industry, to get money. It works well for both people and companies that own property. The repayment period stretches to 20 years, with interest from 8.4% to 12.5% per year.
Lenders may allow borrowing up to 75 to 80% of the property's worth on the open market.
Gold loans are secured, short-term loans where gold assets are pledged to get funds quickly. Perfect for urgent financial situations, these loans are accessible to anyone owning gold. Loan periods can vary from a few months to several years.
Interest varies from 7.5% to 18% per year, with loan sums reaching 90% of the gold's current value.
Policyholders can borrow against life insurance policies that hold a surrender value. It is an option for those with suitable insurance policies, provided the loan term fits within the policy’s remaining period.
Interest charged is around 10% to 12% annually, and borrowing can reach up to 90% of the policy's surrender value.
This is an easy option for those holding fixed deposits who require cash without withdrawing their deposit early. Borrowers can access as much as 95% of the fixed deposit amount. The loan lasts as long as the fixed deposit's term, with interest rates slightly above.
The interest rate is usually higher than the FD interest rate by 1% to 2%.
This approach serves investors wanting to use their investments without selling them. By pledging mutual funds or shares, you can secure funds for personal or business use. Interest begins at 7.50% yearly.
The lenders may allow borrowing up to 65% of the net asset value (NAV) for mutual funds and up to 85% for debt securities.
These loans make it possible to buy two-wheeler, four-wheeler, or commercial vehicles, using the vehicle as security. These loans are available to individuals with reliable incomes. Repayment can extend up to seven years, with interest rates starting at 7% annually.
These loans enable the use of financial assets, like stocks, mutual funds, and bonds, as security. They suit people needing money without wanting to liquidate their investments. Interest ranges from 7.5% to 12% each year, and you can borrow as much as 85% of the value of your securities.
These don't require any security. Lenders provide them based on credit scores, earnings, and past repayment behaviour. Given there's no security involved, lenders face bigger risks, often leading to higher interest rates. The following are the types of unsecured loans in brief:
A personal loan meets different needs, like covering holiday costs, weddings, home improvements, or sudden expenses. They usually feature fast approvals and flexible repayment periods of up to 60 months. Eligibility depends on your income, credit score, and ability to pay back the loan.
An education loan helps students pay for advanced studies, both in India and other countries. These loans cover expenses like fees, room and board, and other school-related costs. Interest is about 8 to 16% per year. Also, there's usually a break (moratorium) before payments begin, often starting about 12 months after finishing the course.
Business loans support businesses and their owners. The money assists with handling business funds, growing the business, or taking care of urgent needs. Getting these loans hinges on the business's earnings, credit rank, and past financial record. Expect higher interest rates, usually around 12 to 18% per year.
Credit cards provide a revolving line of credit for daily spending or urgent situations. and getting approved relies on credit history and income level. Cards have high interest rates, often from 18 to 36% per year, which is only due on unpaid balances. They demand punctual repayment and mindful spending.
Flexi loans in India act as flexible credit options, allowing you to take funds from a pre-set limit as and when you need. Interest applies only to the amount withdrawn, rather than the full credit line. This makes them fit for managing costs that are unpredictable or come up regularly.
One major advantage includes the ability to withdraw and prepay numerous times without extra fees. You can also choose to pay only the interest during the loan period and pay back the principal at the close. This provides better management of your cash compared to standard loans.
Secured loans are usually the cheapest loans in India. This is due to collateral, which lowers the lender's risk and, in effect, lowers borrowing costs. In contrast, unsecured loans carry higher expenses due to the absence of collateral.
However, what is affordable isn't determined by interest alone. Your credit health, income, tenure, loan amount, and overall eligibility all affect the total cost. It’s important to look at the big costs, weigh how easy it is to get approval, and not focus just on the interest.
Choosing the right loan helps keep your finances stable and prevents stress. Knowing how much you can afford to take and what you’ll be paying in the long run matters greatly. After all, you will be paying the EMI for months, if not years. Learning about aspects like interest, other charges, and how flexible the repayment plan is helps you make informed decisions.
What are the major types of loans available in India?
Loans in India are divided into two kinds: secured and unsecured. Mortgages, home loans, vehicle loans, and gold loans fall under secured. Personal loans, business loans, credit card loans, and student loans fall under the unsecured category.
Can I apply for multiple loans at the same time?
Yes, you are typically able to seek several loans at the same time. However, this is not a good practice and can harm your creditworthiness. It is best to do your research and apply for a loan you qualify for.
How do I choose the right type of loan for my needs?
Look at your credit score and income, assess the lender’s interest rates, and determine your eligibility. Negotiate terms and use loan calculators to help with your decision.
Which loan is popular in India?
In India, the most commonly used loans are personal loans due to acceptable rates and simple paperwork.
Which government loan is best?
The government provides loan options to businesses or small business owners. Some options include the MSME Loan and loans offered via the Pradhan Mantri Mudra Yojana (PMMY).
