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Types of Loans Research Team | Posted On Friday, August 28,2009, 07:10 PM

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Types of Loans



Types of Loans

A loan is where you receive money from a bank or a financial institution, with the promise of future repayment of the principal along with interest. The loan is the amount that is borrowed on which interest is charged. Loans are typically secured or unsecured. A secured loan involves pledging an asset as collateral for the loan, where the asset is taken possession of by the lender, in case the debt is not repaid. An unsecured loan is a short-term loan that has no guarantees attached to it. Unsecured loans include credit cards, personal loans and student loans. Owing to the high risk in this type of loan, the interest rate is also higher.

What is Loan?

Loan is kind of debt. Here borrower borrows money from the lender and promises to repay the money within a particular time period along with interest. The borrowed money is called as principal. Borrower has to repay the debt at regular installments or at partial payments. Here the interest charged is the profit for the lender.

Different Types of Loans

There are two important types of loans such as;

  • Secured loan
  • Unsecured Loan

Secured loan

Under secured loans the borrower pledges his private property as collateral or security for the loan. Collateral can be anything such as house property, car, Land, Gold, LIC Bonds et. Secured loan keeps the lender secured, and if the borrower defaults then the property pledged by the borrower will be acquired by lender to get back the money owed. In case the borrower does not have the property to pledge as security then he can have a third person as security for the loan provided that person should be a salaried employee or should own property.

Types of Secured Loans

Unsecured Loan

In this category there will be no assets or property of the borrower kept as collateral for the loan. Examples: Credit Cards, Overdrafts.

Types of loans

The details below will help you in understanding different types of loans.

1. Home Loan

Home loan is a kind of secured loan. It is usually borrowed for the purchase of new property or for the renovation of existing home.

A home loan is simply the amount borrowed by individuals from a financial institution or bank, for purchasing residential property, or to construct or repair a house. Lenders provide the loan for a fixed period and charge interest on the amount borrowed, that has to be paid back along with the principal. These are secured advances and the property that is being purchased functions as collateral against the loan. The amounts sanctioned towards home loans are usually huge and the tenure is long, as the repayment of home loans is done in equal monthly installments (EMIs).

2. Personal Loan

Personal loan is a kind of loan taken for personal purposes such as spending over a ceremony, Holiday tours, Building House or renovating existing one, buying household items, buying home interiors, etc. Tenure of the personal loan varies from 1-3 yrs depending upon the banks.

Personal loan is a type of unsecured loan, which can be availed to help meet financial needs. Generally, no collateral or security is needed to avail a personal loan and the bank doesn’t ask the reasons of availing the loan. Personal loans are availed to meet financial expenses during an emergency or to pursue personal goals. The interest charged on these loans is high, as the loan can be taken without any security.

See Also: How To Apply For An Instant Personal Loan Online?

3. Car Loan

These loans are meant for the purchase of the new vehicle which may be a two wheeler or a 4 wheeler. Tenure of the auto loans varies from 3-5 years depending upon the requirements.

Car loan is a financial borrowing that is offered by a bank or a financial institution to its customer on the purchase of a car.  The rate of interest charged and the amount borrowed, depends on the income and the credit history of the customer. Availing a car loan is usually simple when compared to other loan products. These are secured loans where the car purchased functions as the collateral.

4. Educational Loan

Educational Loan is a loan meant for the higher education. These types of loans are given to students to help them in higher studies. Apart from tuition fee, education loan also meets the needs of books, Hostel fee etc. The only disadvantage of education loan is higher interest rate. Education loan is very easier to get and no security is needed.

The loan is offered to an applicant who wants to avail quality education. An education loan covers tuition fees and other related expenses of the course. An education loan is the money borrowed to finance and manage the cost of higher education. The amount borrowed can be repaid over time along with interest. The special benefit of education loan is that the repayment process starts only after the completion of the course. You also have a moratorium period where you enjoy a repayment holiday and make repayments one year after studies or 6 months after getting a job, whichever is earlier.

5. Business Loans

Business Loans are given to start a new business. This loan can be taken as secured loan as well as unsecured loan. In later case a proper business plan and revenue plan should be submitted to the bank authority along with other basic requirements. And depending upon the type and feasibility of the business, loans will be granted.

It is a loan that is availed for business purposes. The money lent is repaid along with interest to the lender. There are specific documents that need to be submitted to get a business loan like bank statements, income tax returns and the business certificate. The interest rate for these loans is generally high.

6. Commercial Loan

This loan is for the small and medium sized business. Only if the financial position of the borrower is stable then the loan is given. Other conditions like the borrower should have considerable amount of investment in the business and it is also important that he should submit the proof of his investment in the business.

7. Credit cards

A credit card is borrowing now and paying later. The bank/issuer of the credit card, loans out money to the customer, to make a purchase and the loan is repaid at a later date while being charged interest if not paid within billing cycle + grace period. The owner of the credit card can use the card to conveniently pay for goods and services, without having to pay in cash. Through a credit card, you can borrow money (also called cash advance) from a bank to make purchases.

8. Two-wheeler loans:

Also known as bike loans, these are secured loans given by banks or financial institutions for the purchase of a two wheeler transport like bikes. The loan is repaid through monthly equated installments, EMIs. The interest rate is low and affordable. Bike loans can also be availed by applying through online aggregators.

9. Loan against mutual funds:

It is a loan against your equity or debt funds that can be availed from banks or non banking finance companies. The process is similar to overdraft facility that bank accounts offer. An individual can avail a loan by pledging the mutual fund units as security for the debt. The loan will be given based on the value of the units and the tenure chosen.

10. Loan against FD:

Banks provide the facility to avail loans against fixed deposits in case of an emergency or financial need. This is a type of secured loan where the fixed deposits are the collateral. The interest rate charged on these loans is comparatively lower than other loans. Another benefit of loan against FDs is that the borrower keeps on earning interest on the pledged deposits. 

11. Life insurance loan:

Life insurance policies like endowment policies, unit linked insurance plans and money back policies for which premiums are paid for at least three years, qualify for this loan. Term insurance policy does not qualify for this loan as it does not have a surrender/maturity value. The interest rate charged on these loans is lower than personal loans.

12. Loan against property:

Loan against property (LAP) is sanctioned against an asset or a property. These loans are secured and have a lower rate of interest, which makes it easier for an individual to manage the EMIs. It helps to meet emergency needs.

13. Gold loan:

Gold loan is sanctioned on the basis of the price and amount of gold pledged. Gold loans are often used for short term household requirements. Banks do not ask for a guarantor while disbursing a gold loan. The repayment period generally ranges from 3 months to 2 years. There’s no need of a credit score or even being employed.

14. Loan against PPF:

This loan allows PPF subscribers to avail a loan against their deposits. The loan can be availed on the third and sixth financial year of opening the account. Interest on PPF loans should be repaid within 2 months after the principal amount has been repaid. A second PPF loan can only be taken once the first one has been cleared in full.

Advantages of taking a loan

  • Taking loan is a legal way of saving taxes on income.
  • For a business it’s always advisable to have a mixer of loans and equities in its capital structure which would reduce huge tax on income.
  • Loan can fulfill ones necessities and requirements.
  • Hugh money could be obtained at once which would not possible for small salaried employees.
  • It helps in setting up new business ventures and also helps the already existing business.

Disadvantages of taking a loan

  • Hugh interest has to be paid on loans.
  • Borrower may lose his property pledged if at he fails to repay the money.
  • Borrower would be under risk over a longer period.
  • Amount repaid would be much more than what you borrowed.

Points to be remembered before taking a loan

In many banks today we can find floating rate loan as a default option. It means that interest on your loan increases or decreases depending upon the variation in interest rates prevailing in the industry. It is advisable to ask the lender whether the interest rate is fixed for the entire tenure of the loan because the company reserves the right to change the interest rate on loans so in such cases if there is an increase in interest rate then the borrower has to pay much more than estimated earlier. There are some points to be kept in mind while approaching a bank for loan.

  • While taking a loan it is advisable to go for fixed rate loans.
  • It is desirable to know the rate of interest and type of interest of the loan.
  • It is always good to take short term loans as they carry lower interest rates.
  • Details about hidden charges and pre-payment penalties should be known.
  • It is not preferred to go for a personal loan when it is meant for small purchases or for buying household items.
  • Enquire about service charges, administrative charges and processing fee.
  • Enquiring about the takeover charges by the lender is required.
  • Reading the loan agreement before signing is mandatory.

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