There are various types of bank loans available in India, and they can be classified into the following categories;
- Home loan
- Gold loans
- Loans against fixed deposits
- Loan against property
- Loans against mutual funds and shares
- Loans against insurance policies
- Personal loans
- Short-term business loans
- Education loans
- Vehicle loans
- Agricultural loans
1. Home Loan:
- Everyone has a dream of having their own house. Home loan facilitates to build or buy the house at an efficient rate of interest.
- Home loans are a secured mode of finance that means lender has a security against the loan money from borrower as collateral.
- The lender requires a down payment of at least 10-20% of the property’s value of the borrower. The rest amount is to be loaned.
- The disbursed loan amount is depending on the income, its stability and current liabilities of borrower.
- The interest rate charged is far lower than for a personal loan.
- The biggest drawback of the home loan is that the house is the collateral for the loan. The borrower can lose the house in case of default on the loan.
A home loan can be of different types such as:
- Loan for constructing a house
- Loan for renovating the home.
- Loan for purchasing a land
2. Gold Loan:
- Gold loan is the fastest, easiest, and safest among all types of loans for the lender.
- Gold loans are generally used for short-term needs and have a short repayment tenure compared to home loans and loans against property.
- Though gold is a secured mode of loan that is gold loan requires pledging gold jewellery or coins as collateral.
- The loan amount sanctioned is a certain percentage of the gold’s value pledged.
- It requires less documentation as compared to other loans.
3. Loan against Bank FDs:
- The fixed deposit not only offers assured returns but also avails a loan. Thus Fixed deposit in a bank is a very good option for availing loan.
- The amount of loan can vary between 70-90% of the FD’s value and varies across lenders.
- As it is a secured mode of loan, FDs taken as collateral for lender provides security against the loan amount.
- The major potential downside of this loan is that the rate of interest levied on such loan is comparatively higher than that paid by the bank on the FD.
- However, it’s important to note that the loan tenure can’t be more than the FD’s tenure.
4. Loan against property:
- Loan against property is one of the most common forms of a secured loan that can pledge any residential, commercial or industrial property as collateral for availing the funds required.
- The loan amount sanctioned is equivalent to a certain percentage of the property’s value and varies across lenders.
- A loan against property is used to unlock the dormant value of the asset.
- Businesses use a loan against property for business expansion, R&D and product development among others
5. Loan against Mutual Funds or Shares:
- Mutual fund investments or shares are used as collateral for availing the required loan amount.
- The banks give out loans of an amount lesser than the total valuation of the shares or mutual fund investment.
- For availing a loan, the financial institution creates a lien on the certain number of units in the mutual fund to be pledged is marked.
- Similarly, with shares, financial institutions create a lien against shares against which the loan is taken and the loan value is equivalent to a percentage of the value of the shares.
6. Loan against Insurance Policies:
- Life insurance policy facilitates loan with minimal documentation.
- Only those insurance policies that are aged over 3 years are eligible for such loans.
- It is a secured mode loan as the insurance policy is treated as collateral.
- The insurer can themselves offer a loan amount on your insurance policy.
- However, all insurance policies don’t qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value, can be used to avail loans.
- Thus, Term insurance plan is not giving loan as it doesn’t have any maturity benefits.
- Also, loans can’t be availed against unit-linked plans as the returns aren’t fixed and depends on the performance of the market.
7. Personal loans:
- Personal loans are given to accomplish the personal needs of the borrower.
- This type of loans is used for following purposes:-
- To payoff previous debts.
- To buy products, services for personal use
- To go for a vacation or a family trip
- To hedge unexpected/unplanned/urgent expenses
- Since a personal loan is an unsecured mode of finance, the interest rates for are higher compared to the other types of loans.
- Its main advantage over all other loans is an instant flush of liquidity.
- A good credit score along with high and stable income ensures to avail this loan at a competitive rate of interest.
8. Short-term business loans:
- Another type of unsecured loans, a short-term business loan can be used to meet their expansion and daily expenses by various entities and organizations i.e. Working capital loans, Machinery loans and equipment finance, Small business loans for MSMEs, Loans for women entrepreneurs, Loans for traders ,Loans for manufacturers, Loans for service enterprises
- Small business loans are available through most banks and through the Small Business Administration (SBA). These are typically sought by people setting up new businesses or expanding established ones.
- Such loans are granted only after the business owner has submitted a formal business plan for review.
- The terms of the loan usually include a personal guarantee, meaning that the business owner’s personal assets serve as collateral against default on repayment.
- Such loans usually are extended for periods of five to 25 years.
- Interest rates are sometimes negotiable.
9. Education Loan:
- Education loans are those loans which are taken by the students for higher studies .After completing the course and securing the job , the student have to repay the installment of loan
- It provides better support to those students who are financially weak.
- This loan covers the basic fees of the course along with allied expenses such as the accommodation, exam fee, etc.
- A unique feature of an education loan is the moratorium period, wherein the student has the option of not paying the EMIs until after 12 months of completing the course or 6 months after he/she starts working, whichever is earlier
- In this loan, the student is the main borrower while parents, siblings and spouse are co-applicants.
10. Vehicle Loan:
- Vehicle loans are used to purchase vehicle for personal or commercial use
- Vehicle loans are available on various types of vehicle i.e.
- Two wheeler vehicle such as scooter, bike
- Three wheeler such as Auto rickshaws
- Four wheeler vehicle such as car ,jeep
- Heavy vehicles such as truck, bus.
- It a secured loan means if the borrower doesn’t pay the installments in time, the bank has the right to take back the vehicle.
- Vehicle loans are offered either on purchase of a new vehicle or a used one.
- The credit score, ratio of debt to income, loan tenure, etc. play crucial role in determining the loan amount.
- Overdraft is a process of requesting loans from banks. It means that the customers can withdraw more money than they have deposited in their accounts.
- In case of an overdraft facility, if you do not withdraw any amount from your bank account, then no interest is charged.
- However, the rate of interest charged on an overdraft facility is higher as compared to the personal loan.
- Overdraft is an extension of credit when the salary or saving account balance is zero.
- Overdraft facility depends on the customer and bank relationship.
- There are two types of overdraft- secured overdraft and an unsecured overdraft.
- Overdraft loan can be taken against salary accounts, savings account, or term deposits.
- Bank overdraft allows you to meet short-term funds requirements with a flexible repayment option.
- In case of loans, overdraft is the deposit of surplus funds to save interest on loans.
12. Agricultural loan:
- Agricultural loans are taken by farmers for completing various agricultural operations.
- These loans are used for purchasing of pesticides, Fertilizers, irrigation pipes etc related activities.
- There are various government schemes are available for the farmers for providing loan at minimal interest rate.
- One of the most special feature of agricultural loan is Flexible repayment tenure .Thus, the farmer can repay as per their convenience.
- Kisan credit card is a type of Agri loans which allows the farmer to take credit for short term.
- Minimal documentation is required to avail agricultural loans to farmers.
This article is written by;
Mr. Abhishek Chaturvedi
B.Pharma & MBA
(Former Production Officer – Lupin)
Email: [email protected]