Which Are the Different Types of Loans in India?

. 6 min read
Which Are the Different Types of Loans in India?

There are various kinds of loans available in India. However, people choose personal loans over any other type of loan even though they have a variety of assets to mortgage from to avail loans at a lower interest rate. One of the main reasons behind this framework is the lack of knowledge about the other different types of loans available.

What Is a Loan?

A loan is the specified amount of money that a person can borrow from the person willing to lend (usually banks). This loan is given out with the assurance of receiving it back within the agreed period. The interest rate charged is different for different types of loans. The amount is paid back by the borrower in instalments along with interest as per the agreement made between the parties. In India, the loans can be mainly divided into secured and unsecured loans which can be further divided into more subcategories.

Types of Loans

1. Secured loans

Secured loan requires to be backed up by security against the amount being borrowed. The collateral assets secured to act as a right of the lender which s/he can forfeit in case the borrower cannot pay back the money borrowed. These loans are given out at a lower rate of interest as compared to unsecured ones. The Pradhan Mantri Awas Yojana inaugurated by the Prime Minister provides a major impetus towards home loans in the country. Secured loans can be further classified into the following:

2. Home loan

Everyone wants to have a home of their own. But everyone can’t purchase or construct it due to financial constraints. A home loan is a solution to this problem. A home loan helps in providing with the finance, which is necessary to purchase or build the home of your dreams. The loan can be taken for the purchase of a new house, resale of the old one, or improvement and extension of the existing one. The lender asks for 20 percent of the price of the home upfront. The loan amount, which is sanctioned, is deposited in the account within 72 hours of it being sanctioned. The borrower can opt for repaying the loan after a longer tenure so that it does not create stress on your finances.

Loan agreement signing and in background all about loan

3. Loan against property  

In this type of loan, the property is held as a collateral to avail the fund which is borrowed for financing the business or personal requirements. The amount of money lent ranges between 60-70 percent of the fair market value of the residential or commercial property. The borrower can sometimes negotiate with the lender to get the best value of the property.

4. Loan against securities  

This type of loan helps in capitalising your investment by pledging them to borrow funds for funding the household or the business requirements. Investments like shares, mutual funds can be pledged. The banks give out loans of a lesser amount of the total valuation of the securities pledged, which is estimated to be around 70% of the market value. The amount lent is less as if the borrower fails to repay the amount, then the bank charges interest on the amount borrowed. The main advantage of loan against security is that the borrower has multiple payment options and does not have to pay prepayment charges.

5. Unsecured Loans

Sometimes, financial institutions give out loans without taking collateral security. They give out loans based on the credit score of the borrower and their repayment history in the past. These loans can be availed to finance different types of expenses and also can be used in times of emergencies without leaving a dent in their pockets. These loans are charged with a higher rate of interest as compared to the other ones. Further unsecured loans can be classified into the following :

Fountain pen on a loan agreement paper form

6. Personal loan

Personal loans can be taken to finance different types of expenses, such as education, marriage, personal expenses. It can be used to pay off previous debts and buy expensive items. In the past decade, the number of people who have applied for a personal loan to finance their expenses has increased sharply. Between the years 2015 and 2018, the number of people applying for personal loans increased by 27 percent or 4 times of the bank credit. This increase in the borrowing of personal loans is due to several reasons such as lower rates of interest, liquidity, and fast disbursement. Specific documents are required to be filed while availing of personal loans. The KYC documents include an Aadhar card, driving license, and voting card. The borrower has to submit the salary slip of the past two months and income proof has to be submitted in case the borrower is self-employed. A copy of the income tax statement and statement of savings and current account.

7. Small business loan

It does not make a difference if the loan is availed by a budding entrepreneur or a business person looking to expand his/her business. Business loans can be used to fulfil all your requirements and give back for customised solutions. Business loans can be availed for financing capital requirements, expanding premises and hiring staff. The loan amount will be credited within 24 hours when the documents required are submitted. The repayment tenure can be chosen, which ranges between 12-60 months. The time of repayment can be synced with the borrower’s cash flow.

The interest rates charged ranges between 8-15% and also depends upon the economic conditions of the country and the amount of loan which is sanctioned. The interest rates have dropped in the last six months by over 30bps. Generally, one is required to pay back the money within a tenure of a maximum of five years with some periodic payment of principal with interest.Also read:

Happy couple with approved car loan and new modern auto against Bank building background

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?


Q. What eligibility do the banks consider while granting a loan?

Ans. The lending bank considers the following criteria, such as the income level of the applicant, age of the applicant, qualification, and residential status. The past credit history and score is an important factor determining the eligibility of granting the loan.

Q. Is there any provision for taking a joint loan?

Ans. Yes, a lender is allowed to take a joint loan if the application of loan is signed by the co-borrower. The co-borrower must be a member of the immediate family.

Q. What is the maximum number of joint borrowers while availing loans?

Ans. The maximum number of people availing of a joint home loan is six. For taking a home loan in India, only family members such as parents, siblings, and spouse can be taken into consideration while availing a joint loan. The joint borrower needs to have a good credit score and credit history and will be preferred over the person having a low credit score.

Q. What is the maximum sum of money that can be borrowed as a loan?

Ans. The maximum sum of money which can be borrowed depends upon certain factors. If a salaried person is borrowing a loan, then the monthly EMI should not exceed 30% of the monthly payment. Also, the banks take into account any existing loans taken by the borrower. The individual’s financial liabilities are taken into account while granting the loan. The maximum amount granted also depends upon the lender’s terms and conditions.

Q. What are the factors to be considered for applying for a loan?

Ans. Factors such as interest rates, repayment flexibility, processing fee, and customer service should be taken into account while availing of loans.

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