With all the available options, fixing on one loan is tricky. Read on to find out the different types of loans in India and how to choose the best one!
Types of Loans
Deciding which loan works the best for you can be a huge task since there are a bunch of options available. Here are the different types of loans in India:
Secured loans require you to keep an asset as security for your borrowing money. And if you fail to repay the lender, they take your asset in exchange. Since this loan requires collateral, the interest rates are lower than loans without collateral. There are four main types of secured loans in India:
Gold is one of the most favoured secured loans. According to a 2019 report by KPMG, India’s gold loan market is expected to reach the ₹4,617 billionmark with a five-year compounded annual growth rate of 13.4% by 2022. The main contribution to this growth is the availability of flexible interest rates.
With the help of a gold loan, you can satisfy your short-term needs within a short repayment course. To get this loan, you pledge gold coins or jewellery as collateral. Based on the pledged gold’s value, the loan amount is sanctioned.
Loan Against Securities
A loan against securities is funds obtained in exchange of a security item. The security mentioned here can be anything – mutual funds, insurance policy, National Saving Certificate, UTI bonds, non-convertible debentures, Demat shares, and NABARD bonds.
After pledging security, you’re eligible to get steady cash whenever you need it. You don’t have to sell the shares, and hence continue receiving benefit of your dividends and bonus.
For this loan, you’ve to pledge any industrial, commercial, or residential property to avail the funds. You’ll get the loan amount disbursed depending on the percentage of the property value. Based on the lender, some may lend an amount equal to 50-60% of the property value, while some lend money that equates to 80%.
If you’re availing it for your personal needs, you’ll be able to satiate your child’s higher education or marriage requirements. Business owners use this loan for business expansion, product development, and R&D.
With the help of home loans, you can build or buy a home. There are several types of home loans in India like:
- Home Construction Loan: For building a new home
- Top Up Loan: For renovating an existing home or buying the latest interiors for a new home
- Land Purchase Loan: For purchasing a land
You may have to make a down payment of at least 10-20% of the property’s value. Moreover, the loan amount will depend on your stability, liabilities, and income.
Unsecured loans are loans that don’t require collateral for disbursement. The absence of collateral makes way for higher interest rates. Moreover, the lender’s approval depends on your credit score, income, past repayment history and more such factors. So, you’ve to keep a good credit record to avail this loan.
There are several types of unsecured loans in India:
You can face a cash crunch at any moment in your life. From medical emergencies to month-end blues, a personal loan can aid every kind of your financial needs. Hence, it is known as the most versatile form of a loan. Here’s what a personal loan for salaried employees can aid:
- Domestic or an international trip
- Family wedding expenses
- Home renovation project
- Higher education
- Club debts into a single loan
- Unplanned expenses
To avail this loan, you need to have a good credit score and a stable income.
A flexi loan allows you to avail funds from your approved limit and pay interest only on the amount you used. You can prepay the loan with extra cash without any additional costs. This is the best way to control your finances.
Short-term Business Loan
A short-term business loan is great for handling your business expenses. There are several business loans like:
- Loan for women entrepreneurs
- Loan for manufacturers
- Working capital loan
- Small business loan
- Working capital loan
- Equipment finance and machinery loan
Want to buy your dream vehicle but cannot finance it at the moment? Don’t worry, vehicle loans can aid you in purchasing the vehicle of your dream! With this loan, you can buy a new or a second-hand two/four-wheeler. You’re given this loan based on your debt-to-income ratio, credit score, and loan tenor.
Higher education from reputed institutions is an expensive investment. Education loan aids this financial need by covering basic course fees and expenses like exam fee, accommodation fees, etc., for a part-time, full-time, or vocational course. The student is the primary borrower, while the siblings, spouse, and parents are co-applicants.
One of education loans’ best features is the moratorium period. Here the student can choose to not pay EMIs until post 12-month completion of the course or six months after they start working.
Picking the Right Loan
There are tons of loans available in India. With this overwhelming choice, you are bound to get confused. Before you select a loan that ticks all your boxes, make sure you take care of the following points:
Determining the right loan starts with deciding the needs you want to fulfil. It may be for scaling your business, aiding a medical emergency, or covering daily operations. Once you understand your purpose, you can determine the best way to finance it.
Once you understand your needs, search for a loan that offers the best interest rate. Surf through different banks and lending institutions and see what interest rates they offer.
While loans are the best options for salaried or self-employed people, don’t stop your search there. Explore other options. If it’s a small amount, you can always ask your friends or family to lend it.
Fees and Other Charges
Apart from interest rate, there are other additional charges like late payment, processing fees, loan cancellation, service tax, and cheque bounce. Adding these to your loan can end up making it costly. So, look for these.
If you want to fund small cash needs, choose a loan with a short duration. These come with a minimal interest rate. However, if you want to fund bigger monetary needs, longer duration loans are a great fit.
A great debt-to-income ratio is important alongside having a good income. For example, if your monthly income is 1 lakh, and you’re already repaying ₹80,000, you’re not eligible for a new loan, keeping in mind you’ll need the remaining money for running your expenses.
Whatever loan you choose, ensure you’re capable enough to repay it on time! Never borrow more than what you could pay.