What Are the Different Loan Types in India?

In India, various types of loans are available. People prefer personal loans over other types of loans, even if they have a variety of assets to mortgage in order to obtain loans at a lower interest rate. One of the primary reasons for this framework is a lack of knowledge about the various types of loans available.


What Exactly Is a Loan?

A loan is a set amount of money that a person can borrow from someone willing to lend it to them (usually banks). This loan is made with the expectation of repayment within the specified time frame. The interest rate charged varies depending on the type of loan. The borrower repays the loan in installments, plus interest, according to the terms of the agreement. In India, loans are divided into secured and unsecured loans, which are further subdivided into subcategories. Read more about the types of personal loans in India.


Loan Varieties

  1. Loans with securities

A secured loan must be backed up by collateral equal to the amount borrowed. The collateral assets secured serve as a right of the lender that can be forfeited if the borrower fails to repay the money borrowed. When compared to unsecured loans, these loans have a lower interest rate. The Prime Minister’s Pradhan Mantri Awas Yojana provides a significant boost to home loans in the country. Secured loans are further classified as follows:

  1. Mortgage

Everyone desires to have their own home. However, due to financial constraints, not everyone can afford to buy or build it. This problem can be solved with a home loan. A home loan can help you obtain the funds you need to buy or build the home of your dreams. The loan can be used to purchase a new house, resell an existing one, or improve and extend an existing one. The lender requires a down payment of 20% of the purchase price. The sanctioned loan amount is deposited in the account within 72 hours of being sanctioned.

  1. Property-based loan

In this type of loan, the property is used as collateral to obtain the funds that are borrowed to finance business or personal needs. The loan amount is 60-70 percent of the fair market value of the residential or commercial property. Sometimes the borrower can bargain with the lender to get the best price for the property.

  1. Loan secured by securities

This type of loan assists in capitalizing your investment by pledging them to borrow funds for household or business needs. Shares and mutual funds are examples of investments that can be pledged. Banks make loans that are less than the total value of the securities pledged, which is estimated to be around 70% of the market value. The amount lent is less because the bank charges interest on the amount borrowed if the borrower fails to repay it. The primary benefit of a loan against security is that the borrower has multiple payment options and is not subject to prepayment penalties.

  1. Unsecured Loans

Financial institutions will sometimes make loans without requiring collateral security. They make loans based on the borrower’s credit score and previous repayment history. These loans can be used to finance various types of expenses as well as in times of emergency without putting a dent in their pockets. These loans come with a higher interest rate than the others. Unsecured loans are further classified as follows:

  1. Personal loan

Personal loans can be used to finance a variety of expenses, including education, marriage, and personal expenses. It can be used to pay off previous debts as well as purchase expensive items. The number of people who have applied for a personal loan to finance their expenses has increased dramatically over the last decade.

Between 2015 and 2018, the number of people applying for personal loans increased by 27% or four times the rate of bank credit. This increase in personal loan borrowing is due to a variety of factors, including lower interest rates, liquidity, and quick disbursement.

Personal loans necessitate the submission of specific documents. Aadhar card, driving license, and voting card are among the KYC documents. If the borrower is self-employed, he or she must submit the last two months’ salary slips as well as proof of income. A copy of the income tax return, as well as the savings and current account statement.

  1. Loan for a small business

It makes no difference whether the loan obtains by a first-time entrepreneur or a business owner looking to expand operations. Business loans can be used to meet all of your needs and provide you with customized solutions. Business loans can use to fund capital needs, expand facilities, and hire new employees.

The loan amount will credit within 24 hours of submitting the required documents. The repayment period can range from 12 to 60 months. The repayment period can be coordinated with the borrower’s cash flow.

The interest rates charged range between 8 and 15%, depending on the country’s economic conditions. The amount of loan sanctioned. Interest rates have fallen by more than 30 basis points in the last six months. In general, the money must repay within a maximum of five years, with periodic principal and interest payments. Also, read about the personal loan interest rates.

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