A loan entails lending money to a person by the institutions, organizations, or individuals and expects interest from the borrower together with the principal. The interest serves as an incentive to the borrower pushing him or her to act and pay within the timelines drawn on the promissory note. Here in this article, I am going to explain the types of loans in India.
In our today’s world, loans are a very good option and they can be used to aid fulfill people’s dreams. In India, loans are classified in terms of security (secured and unsecured), time duration (short or long term loans), end-use. There are two types of loan in India which are offered in India.
If you are planning to get a loan, do consider calculating loan EMI using our free online EMI Calculator for better planning of loan repayment.
Loan Classification in India
In India, only two types of loan classifications are available:
- Secured loans
- Unsecured loans
1. Secured Loan
In the secured loans, the lender expects collateral attached to the loan amount. They either assets belonging to the person borrowing the loan or anything that can stand for the loan in case the person can’t afford to repay the amount borrowed plus the interest fully. Some of the loans which come under secured loans are;
- House loan
- Car loan
- Land loan
- Mortgage loan
- Gold loan
Features of secured loans in India
- Collateral: The lender uses assets as security in case of loan repayment defaults. Secured loans require collateral so that they can be approved.
- End-use: The usage of these loans can be restricted to flexible. In case you borrow a loan to build a house, the loan is not supposed to be used in any other way than buying the car. The car is the property of the lender until payment is fully settled. In cases of loan against property, the end use of the loan is not restricted.
- Eligibility: In India, you must be of age (21 years), with good credit history and standing employment history as well as remarkable consistency in income for you to secure a loan under the secured loan program.
- Process: The approval and disbursement of the secured loan may take a number of days depending on the type of loan applied for. Some of the loans which require detailed filing have to take time for confirmation of the credentials.
- Interest rates: The interest rates are lowered because the lender has collateral which stands for the loan in case of default.
- Loan amount: One can get up to 80% of the value of the property that is being used as collateral also for mortgaging property; one can get up to 60% of its value.
- Tenure: Secured loans can either be medium or long-term loans and the repayment periods, depending on the type of loan or the lender, can be repaid for years or a couple of decades.
2. Unsecured Loans
The main considerations for eligibility in this type of loan are the creditworthiness of the borrower. They never have attached collateral to stand for the loan in case of default.
Features of unsecured loans
- Collateral: Most of the unsecured loans are used in multiple activities. The lending decision is arrived at through a thorough cross-check of the borrower’s background data and credit history.
- End-use: The loan usage is not limited and therefore the borrower can decide to use it in any way beneficial to him or her.
- Eligibility: The borrower must be of age (21-65 years), be employed with a good salary scale or self-employed with good income flow and well-maintained credit history.
- Process: They take much less time to be approved because there are very few legal confirmations needed.
- Interest rates: This is one of the most expensive loans when it comes to interest. Its interest can even be more than 30% in a year depending on the borrower’s credit history with the lender.
- Tenure: The repayment period for these ranges between 1-5 years and its very flexible on its usage terms. It’s classified under the short term loans.
Different Types of Loan in India
The different types of loans in India are:
1. Home loan
- Home extensions
- Construction of home
- Home renovation projects
- Land purchase loans
The bank allows borrowers to get up to 85% of the value of the property they want to invest in. Based on their value of value from other institutions. The repayment period for housing loans ranges from 5-20 years. The interest rate lies between 8% to 8.6%. House loans come under secured types of loans in India.
2. Education loans
The education loans are given to students either schooling in institutions within India or outside India. Those within India get up to Rs.7.5 lakh while those schooling from outside India gets up to s. 15 lakh. The repayment only is done after course completion, two years, and six months from the year of completion. The tenure of repayment ranges between 10 to 15 years depending on the loan amount, and the time the repayment commenced. The interest rate does not go below 11% and doesn’t rise above 15%.
3. Car or vehicle loan
Vehicle loan is easy to get having fulfilled the following;
- Minimum net annual salary or income ranging at Rs.10, 000/= per month and Rs.2.5 lakh of the respective lender.
- A minimum of one full year employment.
- Minimum of 3 years’ operating the current business.
- For self-employed, a minimum of net annual business income between Rs.10,000 /=per month and 1,80,000 /= per annum.
4. Business loan
A business loan is acquired by people who have ventured in business for either expanding or starting business firms. The loan varies between one lakh and one crore. The eligibility is based on the credit score and the borrower must-have in the business venture for at list 3 years. The tenure is variable between 6 months to 5 years with an interest rate varying between 12% to 17%.
5. Personal loan
This loan is given to individuals based on their occupation, profession or business. The loan is flexible to be used for any purpose. The repayment period runs from 12 months to 60 months depending on the loan amount. The interest rates range from 15%to 28% from different lending institutions. The bank rules are against repayment of loans within the initial period of 6 months.
I’ve explained the types of loans in India that are provided by the banks and other lending institutions. I hope you got an idea of loan types in India. Both secured and unsecured loans have their disadvantages, therefore any borrower needs to consider the terms for each before arriving at his or her decision to apply for the loan.