Types of Loans: Secured, Unsecured, Business Loans
From securing a dream home to funding a startup, India offers a diverse range of loans tailored to suit various needs and circumstances. But with so many options, where do you begin? Don’t worry! This page helps you to understand different types of secured and unsecured loans. Whether you’re a homeowner, budding entrepreneur, or student with big goals, let’s explore the opportunities and empower you to make informed choices.
Types of Loans
Secured Loans
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- Home loans
- Car loans
- Loan Against Property (LAP)
- Gold Loans
- Loan Against Securities (LAS)
- Loan Against Rent Receivables (LARR)
- Loan Against Fixed Deposit (FD)
Unsecured Loans
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- Personal Loans
- Credit Cards
- Business Loans
- Education Loans
- Personal Line of Credit (PLOC)
- Payday Loans
- Wedding Loans
Secured Loans
When you take out a secured loan, you pledge an asset or property as collateral to the lender. This means that if you are unable to repay the loan, the lender has the right to seize and sell the collateral to recover the amount owed. Because the lender has this guarantee, secured loans typically offer lower interest rates than unsecured loans. Some common examples of secured loans include home loans, car loans, and loans against property.
There are different types of secured loans based on the security they require from the borrower. Each type of secured loan has its own advantages and features, allowing borrowers to access funds based on their financial requirements. The collateral provides security to the lender, reducing the risk. This results in favourable loan terms and lesser interest rates than unsecured loans.
Types of Secured Loans
Home Loans:
Home loans are the most popular type of secured loan in India provided to purchase residential properties. Owning a house is a dream for most people in the country, which is why home loans remain a popular financial product. Banks or lenders do not hesitate to provide these loans as the residential property purchased using the loan amount itself acts as the collateral to the loan. Hence the interest rates and terms of a home loan typically remain competitive.
Car Loans:
Car loans are availed to purchase a new or used vehicle. The car itself acts as collateral, and the loan amount is typically a percentage of the vehicle’s market value. The loan amount covers a significant portion of the car’s cost, and the borrower needs to repay the loan over a predetermined period through equated monthly instalments (EMIs).
Loan Against Property (LAP):
LAP or Loan Against Property is a type of loan where borrowers can secure funds from banks or financial institutions by pledging their residential or commercial property as collateral. The loan amount is based on the property’s market value and the borrower’s repayment ability. LAP is a popular choice for those who require a substantial amount of funds for diverse purposes such as business expansion, education, marriage, or debt consolidation. LAP offers lower interest rates, However, if a borrower fails to make timely payments, the lender may seize the property to recover the outstanding amount.
Gold Loans:
Gold loans requires borrowers to use their gold ornaments, coins, or assets as collateral to secure funds from banks or financial institutions. The value of the gold determines the amount of the loan pledged. Gold loans are a popular choice due to their fast processing, minimal documentation, and accessibility to individuals from various financial backgrounds. Gold loans typically have lower interest rates because the gold collateral provides security to the lender.
Loan Against Securities (LAS):
LAS is a type of loan that can be availed by pledgimg financial assets such as shares, mutual funds, or fixed deposits. The amount of the loan is determined based on the value of the securities pledged. LAS provides individuals with a way to access the value of their investments without having to sell them.
Loan Against Rent Receivables (LARR):
LARR loans allow property owners to use their rental income as collateral to obtain loans from banks. The loan amount is calculated based on the expected rent receivables over a certain period. Borrowers can use the funds for property renovation, business expansion, or personal finance needs. The rental income serves as security for the loan.
Loan Against Fixed Deposit (FD):
A Loan Against Fixed Deposit is a type of loan in which individuals can pledge their fixed deposit as collateral and borrow a percentage of its value, generally ranging from 70% to 90%. Since the fixed deposit serves as security, the interest rates offered on these loans are lower than those on unsecured loans.
Unsecured Loans
When individuals borrow money from banks or financial institutions without providing any collateral or security, it is called an unsecured loan. These loans are granted based solely on the borrower’s creditworthiness, income, and capacity to repay the loan. Due to the absence of any asset backing the loan, interest rates on unsecured loans are generally higher compared to secured loans. Personal loans, credit cards, education loans, and business loans are some common examples of unsecured loans. Borrowers must repay the loan through regular instalments over a specified period. Failure to do so may lead to penalties and negatively impact the borrower’s credit score.
There are different types of unsecured loans with various borrowing options that do not require collateral or security from the borrower.
Types of Unsecured Loans
Personal Loans:
Personal loans are offered to eligible individuals considering their credit history and income. The loan can be used for various purposes, including medical emergencies, travel expenses, educational costs, or consolidating debt. Banks determine the eligibility of the applicant and set the interest rate.
Credit Cards:
Credit cards are a widely used type of unsecured credit that enables users to purchase up to a predetermined credit limit. The monthly repayment is mandatory, and interest is levied on any outstanding balances.
Business Loans:
Unsecured business loans are designed for entrepreneurs and small business owners who require funding for business expansion, working capital, or other business-related needs.
Education Loans:
Education loans provide financial assistance to students who wish to pursue higher education in India or abroad. The loans cover various expenses such as tuition fees, living expenses, and other educational costs associated with the program.
Personal Line of Credit (PLOC):
With a Personal Line of Credit, borrowers get a pre-approved credit limit that can be accessed as and when needed, up to the approved limit. Interest is only charged on the amount they use. PLOC typically has higher credit limits and possibly lower interest rates. The funds can be used for different purposes, and repayment is based on usage.
Payday Loans:
If you need fast cash to cover unexpected expenses or financial emergencies until your next payday, you might consider a payday loan. These short-term loans are typically repaid in full on your next payday or within a few weeks. They have a quick approval process and minimal documentation requirements and often come with high-interest rates.
Wedding Loans:
Consider a wedding loan to pay for all your wedding expenses. This includes booking the venue, catering services, decorations, photography, and other essential services. This unsecured loan allows for fixed monthly repayments, making it easier to manage your finances. But be sure to carefully consider the loan amount and terms before committing.
To sum up, India offers a variety of loans to meet different financial needs. Whether you want to buy a home, pay for education, grow your business, or achieve personal goals, there is a loan that suits your requirements. However, before getting a loan, it’s crucial to assess your financial situation, review the terms and conditions, and select the loan that fits your goals and ability to repay.
FAQs on Types of Loans
Eligibility to apply for a loan is based on the type of loan and the policies of the lender. Typically, factors such as age, income, credit score, employment status, and current financial responsibilities are considered. Additional eligibility criteria may be necessary for secured loans, such as collateral value and property ownership. The process of applying for a loan can differ from lender to lender. Many banks and financial institutions provide the option of applying for a loan through their website or mobile application. The borrower must provide the necessary details, upload the required documents, and submit the application online. Alternatively, they can visit the nearest branch to apply in person. Loan processing times vary depending on the type of loan and the lender's efficiency. Personal loans and small-ticket loans usually have a faster processing time, taking anywhere from a few hours to a few days. On the other hand, home loans and other major loans may take longer, sometimes lasting several weeks, due to extensive verification and documentation requirements. Loan interest rates can differ depending on the type of loan, the lender's policies, and the borrower's creditworthiness. Generally, secured loans such as home and car loans have lower interest rates compared to unsecured loans like personal loans. Borrowers can choose between fixed-rate and floating-rate options, giving them flexibility in how they repay the loan. Monthly payments, known as EMIs, are required by borrowers to repay their loans. These payments include both the principal amount and the interest component. The loan amount, interest rate, and tenure determine the EMI amount. Lenders provide online EMI calculators to assist borrowers in estimating their monthly repayments based on these factors.What are the eligibility criteria for obtaining a loan in India?
How can I apply for a loan in India?
How long does it take to process a loan application?
What are the typical interest rates for loans in India?
How are Equated Monthly Installments (EMIs) calculated for loans?