How Many Types Of Loans Are There In India?
How Many Types Of Loans Are There In India?
The banking industry manages the finances in a country, including cash and loans. Banks accept deposits of people’s money and give loans to institutions and thus banks play a major role in maintaining the economic stature of a country. Given their importance to the economy, banks are placed under strict regulation in most countries. In India, the Reserve Bank of India (RBI) is the apex banking institution that controls the monetary policy in the country.
Banks are classified into four categories –
- Commercial Bank
- small finance bank
- payment bank
- Cooperative bank
Commercial banks can be further classified into public sector banks, private sector banks, foreign banks and regional rural banks (RRBs). On the other hand, cooperative banks are classified into urban and rural banks. Apart from these, there is a completely new addition to the payments bank structure.
Term Loan – Term loan means a specified amount given for a fixed period usually between one to ten years and to be paid back with interest. It is a financial product designed to be offered either as personal financial assistance to the public or to business organizations for a fixed period of time. It creates a relationship between the bank and the borrower for a specified period in which both the parties are bound by its terms and conditions as stated in the agreement.
Types of Term Loan
Every bank introduces “Term Loan” as their financial product to attract customers, so it is very important that you know the type of bank loan. Most financial institutions offer their products in the form of term loans. Hence it is important to know the different types of term loans.
There are three main classifications found in term loans: short term loans, intermediate term loans and long term loans. This classification depends on the period of time i.e. the period for which the money has been lent. Short term loan can be for buying home appliances or long term loan for buying a home or intermediate term loan for buying a car.
Short Term Loan or Short Term Loan – It is a single purpose loan, which matures within a year mainly to meet unexpected cash crunch. This, helps to either protect the loss hence boost the cash flow, or make some nice profit from the utilization deal. In some occasions, it serves as working capital in the manufacturing industry for inventory purchases.
Medium term loan or Intermediate term loan – taken for a planned purpose with a repayment tenure of 1 to 5 years. Repayment can be either from the loan amount or from the profit generated from various sources. For example, buying a car may not result in a direct benefit, but it does promote the convenience of trade.
Long Term Loans – Mortgage loans used to invest in real estate and similar assets are considered long term loans. The loan amount may or may not generate profit and will have a repayment period of more than 5 years. Long term loan is one of the types of bank loan. In this, banks have low risk, safe loan disbursement because of their mortgage collateral.
Loan Types in India
There are many different types of loans available in India, which are divided into two categories based on the purpose of the loan:
- secured loan
- unsecured loan
Secured Loans – Secured loans must be backed by collateral equal to the amount borrowed. Collateral is property secured to operate as a right of the lender that can be seized if the borrower fails to repay the loan. In comparison to unsecured loans, these loans have a lower rate of interest. Secured loans are further divided into the following categories, to give you an idea of the different types of loans:
- gold loan
- loan against securities
- loan against property
- having loan
- Corporate/Business Loan
Gold Loan – Gold has long been considered one of the most popular asset classes. According to KPMG estimates, the organized Indian gold loan sector is expected to reach Rs.3,101 billion by 2019-20, that too on account of flexible interest rates from financial institutions. For a gold loan, you have to pledge gold jewelery or coins as security. This type of loan amount is based on a proportion of the value of the gold pledged. Compared to house loans and loans against property, gold loans are often used for short-term purposes and have a shorter payback period.
Loan Against Securities (LAS) – Loan against securities is a loan in which you pledge your shares, mutual funds or life insurance policies as collateral to the bank against your loan amount. Loan against securities is usually offered as an overdraft facility in your account after you have deposited your securities. You can withdraw money from the account, and you pay interest only on the loan amount you use and for the tenure you use.
For example, you are offered a loan against shares worth Rs 2 lakh and out of that you withdraw Rs 50,000 and deposit the amount back into your account in a month. In this case, you are liable to pay interest on Rs 50,000 for only one month.
The loan you are eligible for depends on the value of the securities you provide as collateral.
Loan Against Property (LAP) – One of the most common types of secured loans is the loan against property. To get the required finance, you can mortgage any residential, commercial or industrial property. The loan amount offered varies by the lender and is equal to a specific percentage of the property value.
While some lenders may provide 50-60% of the value of the property, others may offer up to 80%. Loan against property allows you to access the unutilized value of your property and can be used to fulfill personal ambitions like further education of children or marriage. Businesses take out loans against property for a variety of reasons, including expansion, research and development, and product development.
Home Loan – A home loan is a type of secured credit that allows you to buy or construct your dream home. Following are the types of home loans offered in India:
You will need finance to buy land for your new home.
Financials will be needed to build a new house.
Balance Transfer on Home Loan: Transfer the balance of your existing mortgage to a low-interest loan.
Add-on Loan: This can be used for renovation of an existing home or for creating the most modern interior design for a new home.
It is to be noted that while buying a new property/house, the lender requires a down payment of at least 10 to 20% of the value of the property. The amount you receive depends on a variety of factors including your income, its stability and your current responsibilities.
Corporate/Business Loans – Corporate/Business loans are offered to small and medium sized firms to help them meet various requirements. These loans can be used for a variety of things that help the company flourish such as purchasing equipment, purchasing inventory, paying staff salaries, marketing expenses, paying business debts, administrative expenses payments, and even starting a new branch or acquiring franchises such as KFC and Domino’s.
The age of the business owner, number of years the firm has been in operation, income tax returns, and a statement of the previous year’s turnover audited by a chartered accountant are all qualifications common to all small business loans.
Unsecured Loans – Financial institutions offer different types of loans without any collateral depending on various factors such as repayment history, credit score of the borrower and other considerations. Lenders can use these loan types to fund a variety of activities and deal with unforeseen expenses without breaking the bank’s rules. However, in comparison to other loans, these types of loans in India have a higher rate of interest. Following are the various forms of unsecured loans that you can use for your needs.
- personal loan
- vehicle or car loan
- education loan
There are different types of loans available in India, which are as follows:
Personal Loan – A personal loan is one of the most common unsecured types of loans that provide quick cash. It is available at a higher rate of interest than secured loan as it is an unsecured loan. If you have a solid credit score and a high and consistent income, you can avail this loan at a cheaper interest rate. Personal loans can be used for a variety of things, including:
- Family to organize all the expenses related to marriage
- to pay for leave or travel abroad
- To invest money on a home remodeling project
- for further education of your child
- To consolidate all your loans into one loan
- To meet unexpected/urgent expenditure
In the last decade, the number of people availing personal loans to meet various requirements has increased exponentially. The unsecured type of loans increased by about 27%, or four times the bank’s lending rate, particularly during 2015 and since 2018. Low interest rates, liquidity and faster disbursements are all factors that have contributed to credit growth. With the help of a personal loan eligibility calculator, you can get an idea of how much loan you can avail.
The following documents are required for the type of personal loan:
- Aadhar Card, Driving License and Voter Card
- For self-employed professionals, salary receipts for the last two months and proof of income are required
- Statement of your savings and checking accounts
- a copy of your income tax return
- form 16
Vehicle or Car Loan – Vehicle loan helps you buy a two or four wheeler, whichever is the vehicle of your choice. Car loans are available for the purchase of a new or used vehicle. Your credit score, debt-to-income ratio, loan term, and other factors all play a role in calculating the loan amount.
You can fulfill your dream of owning a car by availing a vehicle loan. Since credit reports are used to determine your loan eligibility, having a high credit score is beneficial while applying for a vehicle loan. The loan application will be approved quickly, and you may be eligible for a cheaper interest rate. Car loans are backed by collateral. If you don’t pay your installments, the lender will repossess your vehicle and collect the loan.
The following documents are required for a vehicle loan:
- Aadhar Card, Voter Card and PAN Card
- Bank statement
- income proof
- Employment/Business Continuity Proof
- 2 passport size photographs
- proof of identity
- address proof
- a copy of your income tax return
- form 16
Education Loan – The need for higher education from reputed schools and colleges has increased the demand for education loans in the country. This type of loan covers the basic tuition of the course and additional expenses like accommodation, testing fee etc. The student is the principal borrower on this loan, with parents, siblings and spouse as co-applicants.
A full-time, part-time, or professional course, as well as undergraduate and postgraduate courses in management, engineering, and medicine, can all be paid for with an education loan. After the completion of the course, the student has to pay back the loan. There is a moratorium period in which the student can consider paying EMIs up to 12 months after the completion of the course or six months after starting employment, whichever comes first, and this education loan has a unique element.
Financial institutions approve secured and unsecured loan types for additional purposes as long as the funds are used for a legitimate purpose. Pay your bills on time as this goes a long way to guarantee good financial health. Before applying for the loan, it is necessary to be careful in examining the advantages and disadvantages of secured and unsecured loans.