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Types of Loans in India: A Complete Guide to Borrowing Money

July 20, 2023

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    Ever wondered how many types of loans are there? In this article, we break down different types of loans available to help you find the right one for your financial need!

    Loans form an integral part of every adult’s life, acting as a rite of passage into adulthood and financial responsibility.

    Whether it's purchasing a new home, pursuing higher education, launching a business venture, or coping with unexpected financial challenges, loans provide the necessary financial support to bridge the gap between our dreams and reality.

    As we navigate the complex world of borrowing and lending, understanding different types of loans and their unique characteristics becomes paramount. 

    In India, a wide array of loan options are available to cater to the diverse needs and circumstances of individuals and businesses.

    In this blog, we will look into all types of loans that are commonly used and help you understand which option may be right for you. But before we dive into all that, let's start with the fundamental distinction between secured loans and unsecured loans.

    Secured Loan Vs. Unsecured Loans

    Secured loans and unsecured loans are the two primary types of loans that individuals and businesses can avail of.

    The key distinction between them lies in the presence or absence of collateral. Collateral can be an asset of value, such as a property, vehicle, or savings deposit, which the borrower pledges to the lender as a guarantee of repayment. 

    Secured Loans

    Secured loans are loans that require collateral as a form of security for the lender. In the event of default on the loan, the lender has the right to seize and sell the collateral to recover the outstanding debt.

    Due to the reduced risk for the lender, secured loans typically offer lower interest rates and higher borrowing limits.

    Common examples of secured loans include home loans, car loans, and secured personal loans. We will discuss these types of secured loans in detail, later in the blog. 

    Unsecured Loans

    Unsecured loans, on the other hand, do not require any collateral from the borrower.

    These loans are approved based on the borrower's creditworthiness, income, and repayment capacity. Since there is no underlying asset serving as security, unsecured loans pose a higher risk for lenders.

    Consequently, interest rates for unsecured loans tend to be higher, and the loan amounts granted are generally lower compared to secured loans. Personal loans, credit card loans, and student loans are common types of unsecured loans.

    Understanding the difference between secured loans and unsecured loans is crucial when considering loan options. Now, let’s dive into the different types of loans under each- secured and unsecured categories. 

    Types of Secured Loans 

    There is a wide range of secure loan options available for individuals and businesses that allow them to leverage their assets and obtain the funds they need. Here are some key types of secured loans available in India: 

    Home Loans 

    Home loans are secured loans provided by financial institutions to help individuals purchase or construct a residential property.

    The property being purchased serves as collateral for the loan. These loans usually have longer repayment tenures and competitive interest rates, making homeownership more accessible.

    The average interest rates for home loans in India typically range from 6.70% to 9.00%, depending on factors such as the borrower's credit profile, loan amount, and repayment tenure. However, it's important to note that these rates can vary among different banks and housing finance companies.

    Gold Loan 

    Gold loans are secured loans where borrowers pledge their gold ornaments or coins as collateral.

    The lender assesses the value of the gold and offers a loan amount based on a percentage of its appraised value. Gold loans are relatively easy to obtain and can be used for various purposes, such as meeting short-term financial needs or funding business requirements and they can even help improve your credit score.

    Interest rates for gold loans generally range from 7.00% to 29.00%, depending on the lender, loan amount, loan-to-value ratio (LTV), and the purity and value of the gold being pledged as collateral. 

    Loan Against Property (LAP) 

    A loan against property is a type of secured loan where borrowers pledge their residential or commercial property as collateral to obtain funds.

    The loan amount is usually a percentage of the property's market value. LAPs are versatile and can be used for a wide range of purposes, including business expansion, debt consolidation, education expenses, or medical emergencies.

    Interest rates for loans against property typically range from 8.50% to 14.00% in India but the actual interest rate depends on a variety of factors. 

    Loan Against FDs

    Individuals holding fixed deposits with banks can avail themselves of loans against their FDs.

    The loan amount is typically a percentage of the FD's value. Loan against FDs provides a convenient option for borrowers who require immediate funds without breaking their fixed deposit investments.

    These are the best types of loans with low-interest rates since the FD itself acts as collateral.

    The interest rates usually range from 1.00% to 2.00% above the FD interest rate, which can vary depending on the bank or financial institution.

    Loan Against Insurance Policies

    This type of secured loan allows individuals to borrow against the surrender value of their life insurance policies.

    The loan amount depends on the policy's terms and the surrender value.

    Loan against insurance policies offers a way to access funds in times of financial need while keeping the insurance coverage intact. Interest rates for loans against insurance policies can vary significantly among insurers but generally range from 9.00% to 12.00%.

    The interest rate is influenced by factors such as the type of policy, surrender value, and repayment tenure.

    Loan Against Shares and Mutual Funds

    Borrowers who hold shares or mutual funds can pledge them as collateral to obtain loans.

    The loan amount is determined by the value of the shares or mutual funds.

    This type of secured loan provides liquidity to investors without requiring them to sell their investment holdings.

    The interest rates for loans against shares and mutual funds can range from 9.00% to 14.00%, depending on factors such as the borrower's creditworthiness, the quality and market value of the pledged securities, and the loan amount.

    Working Capital Loans

    Working capital loans are a form of secured financing that businesses use to cover their day-to-day operational expenses, such as inventory purchases, payroll, and overhead costs.

    These loans are typically secured by business assets, such as accounts receivable, inventory, or machinery. 

    Types of Unsecured Loans 

    While unsecured loans have higher interest rates, compared to all types of loans available, they are the best when you need money in an emergency. Here are the 4 most common types of unsecured loans available in India: 

    Personal Loans 

    Personal loans are unsecured loans provided by banks and financial institutions to individuals for various personal purposes like debt consolidation, medical emergencies, travel, or home renovation.

    Taking a personal loan is a good idea when you want to finance a major purchase but don't want to be locked into how you use the money.  The interest rates for personal loans generally range from 10.00% to 24.00% but these numbers can significantly vary from provider to provider. 

    Short-Term Business Loans

    Short-term business loans are unsecured loans designed to meet the immediate working capital needs of businesses.

    These loans help cover expenses such as inventory purchase, payroll, or equipment maintenance. Interest rates for short-term business loans can vary significantly based on factors such as the business's creditworthiness, industry type, loan amount, and tenure.

    On average, interest rates for short-term business loans in India can range from 12.00% to 28.00%.

    Student Loans

    Student loans are unsecured loans specifically designed to finance education-related expenses, including tuition fees, books, accommodation, and other educational costs.

    The interest rates for student loans can vary depending on the lender, the borrower's creditworthiness, the course being pursued, and the loan amount.

    On average, interest rates for student loans in India range from 9.00% to 15.00% but this number can reduce if a collateral is provided. 

    Credit Cards

    Credit cards are some of the most popular types of loans offered by commercial banks and are unsecured credit that allows individuals to make purchases or access funds up to a certain credit limit.

    The interest rates for credit cards can vary significantly among different card issuers and depend on factors such as the cardholder's credit history, outstanding balance, and repayment behavior. 

    Understanding Which Loan is Right for You 

    Ultimately, choosing the right type of loan for you is completely dependent on your current financial situation and finding the right repayment plan that you’re comfortable with. When evaluating loan options, consider factors such as the purpose of the loan, loan amount, interest rates, repayment terms, and eligibility requirements.

    For example, if you are planning to purchase a home, a home loan may be the most suitable option. If you need funds for personal expenses, a personal loan can provide the flexibility you need. Assess your financial situation, repayment capacity, and future plans to make an informed decision.

    It's also helpful to compare loan offers from different lenders, consider the associated fees and charges, and seek professional advice if needed. By understanding your requirements and conducting thorough research, you can select the loan that aligns with your financial objectives and helps you achieve your dreams.