What are the Different Types of Loans Available in India?

A loan is essentially an amount borrowed for a fixed period. The amount borrowed requires it to be repaid along with a predetermined amount of interest that is calculated on the principal amount. There are different types of loans in India which can be subdivided into secured and unsecured loans.

Different Types of Loans Available in India

Loans can be broadly categorized into two main types: secured loans and unsecured loans.

Secured Loans

Secured loans are backed by collateral, which is an asset you pledge as security against the loan. These loans typically offer lower interest rates and higher borrowing limits due to the reduced risk for the lender. Common examples include:

• Home Loans: Used for buying or constructing a house.
• Car Loans: Specifically for purchasing vehicles.
• Loan Against Property: Where you use your property as collateral.
• Gold Loans: Secured by gold jewelry or assets.
• Secured Business Loans: Supporting business ventures with collateral.

Unsecured Loans

Unsecured loans, on the other hand, do not require collateral, making them accessible to a broader range of borrowers. They are approved based on creditworthiness and financial stability. Some popular unsecured loans are:

• Personal Loans: Versatile loans for various personal expenses.
• Credit Cards: A revolving line of credit.
• Education Loans: Funding for educational purposes.
• Travel Loans: To fund vacations and travel adventures.
• Medical Loans: Covering medical expenses.

Different Types of Unsecured Loans in India

Financial institutions offer loans without collateral based on different factors like the borrower’s credit score, repayment history etc. Lenders can avail of these loans to finance different experiences as well as deal with emergencies without creating a dent in their pockets. The different types of unsecured loans you can avail of to finance your requirements are as follows:

1. Personal Loan

You can opt for a personal loan to finance any of your requirements that include education, marriage etc. The number of persons applying for personal loans to finance different needs has increased sharply in the past decade. Between 2015 and 2018, unsecured loans have witnessed a growth of approximately 27 per cent or 4 times the bank credit. The increase in borrowing growth is attributed to several reasons like lower interest rates, liquidity and quicker disbursements etc. Receive an estimate of the amount you are eligible for with the help of a personal loan eligibility calculator.

The required documents for personal loans include:

• KYC documents that include Aadhaar card, driving license, voting card etc.
• Salary slips of the last two months and income proof for self-employed professionals.
• Savings/current account statements.    
• A copy of the Income Tax statement.
• Form 16.

2. Small Business Loan

It doesn't matter whether you are a budding entrepreneur or a business person looking to expand your business. Business loans have your back with customized solutions for all your requirements. You can avail of a business loan right from financing your capital requirements, expanding premises as well as hiring staff. The advantages of opting for small business loans include:

• The loan amount approved will be credited to your account shortly after loan approval, with only minimum documents that can enable you to commence operations without delay.
• Choose a repayment tenure that ranges from 12-60 months that best suits your requirements. Time your repayment in sync with your cash flow.

Must Read: Types of Unsecured Loans in India

3. Education Loans

Designed to finance the educational pursuits of students, these loans cover tuition fees, living expenses, and related costs, easing the burden of educational expenses. Apply for Personal Loan for Higher Education.

4. Wedding Loan

Designed to cover wedding expenses, these loans help couples create memorable celebrations by offering funds for venues, catering, attire, and other wedding-related costs. Apply for Personal Loan for Wedding. 

5. Vacation Loan

Enabling individuals to enjoy their dream vacations, these loans provide the necessary funds for travel expenses, accommodations, and leisure activities, making travel aspirations a reality. Apply for a Personal loan for Holiday.

Different Types of Secured Loans in India

Secured loans require you to provide an asset as a security against your borrowing. The assets secure the rights of the lender in case the borrower cannot make good the borrowings. The loans have a lower rate of interest as compared to unsecured loans.  The Pradhan Mantri Awas Yojana initiative by the Prime Minister of India has provided a major impetus to home loans in India. A couple of secured loans include:

1. Home Loan

A home loan provides you with the finance required to purchase or construct the home of your dreams. You have the option of applying for a loan to purchase a new or resale home, home improvement and extension. The lender requires you to pay approximately 20% of the cost of the home upfront.

The loan amount sanctioned is disbursed to your account approximately 72 hours* after it has been sanctioned.

You can opt for a longer repayment tenure to ensure that the home loan does not cause a strain on your finances.

2. Loan Against Property

Property loans allow you to mortgage your property to avail of funds to finance your business or personal requirements.

The loan amount disbursed ranges between 60-70% of the market value of a residential or commercial property. Negotiate with the representative of the lender to vail the best value on your property.

Contact the lender’s representatives to avail of a product that best suits your needs.

Must Read: How To Get Tax Benefits On Loan Against Property

3. Loan Against Securities

Loan against securities allows you to capitalize your investments by pledging them to borrow funds for personal or business requirements. You have the option of pledging investments like shares, mutual funds etc. Advantages of opting for a loan against securities include:

Pledge a wide number of approved securities like shares, mutual funds, bonds etc. to obtain a loan of approximately 70% of the units pledged. Reap the benefits of multiple repayment options and no prepayment charges.

4. Gold Loan 

A financial instrument where you pledge your gold assets as collateral to secure a loan, providing immediate liquidity while retaining ownership of your gold holdings.

5. Loan Against Insurance Policies

An arrangement allowing policyholders to borrow against the cash value of their life insurance policies, without surrendering the policy itself.

Must Read: All You Need to Know About Loan Against Insurance Policy

6. Loan Against Mutual Funds and Shares

A financing option that permits the use of mutual fund units or shares as collateral for obtaining a loan, preserving long-term investments.

7. Loan Against PF/EPF 

Borrowing against your Provident Fund (PF) or Employee Provident Fund (EPF) balance, offering a source of short-term funds without affecting your retirement savings.

8. Loan Against Fixed Deposit 

A credit facility where a fixed deposit serves as collateral, allowing access to funds while maintaining the deposit's interest and tenure.

9. Vehicle Loan

A structured lending arrangement for financing the purchase of vehicles, including cars and two-wheelers, tailored to meet transportation needs.

10. Car Loan

A financial product designed to facilitate the acquisition of an automobile, either new or used, through structured lending and repayment terms.

11. Two-wheeler Loan

A loan product specifically intended for the purchase of two-wheelers, streamlining the process of acquiring such vehicles.

Difference Between Secured and Unsecured Loans

Secured vs Unsecured Loan – Pros and Cons

Conclusion

In the world of lending, the choice between secured and unsecured loans comes down to a careful consideration of individual circumstances and financial goals. Secured loans, backed by collateral, offer lower interest rates, higher loan amounts, and easier approval for those with valuable assets. However, the risk of asset loss in case of default can be a significant drawback, making it crucial to weigh the benefits against potential consequences.

On the other hand, unsecured loans, although have stricter eligibility criteria, provide borrowers with a more accessible and versatile financing option. They require no collateral, offer faster approval, and allow funds to be used for various purposes without restrictions.

Ultimately, the decision hinges on personal financial stability, risk tolerance, and the intended use of the loan.