In general, loans are capital withdrawals from a bank or other financial institution. These organisations charge interest on loans made for a predetermined length of time. Bank loans can help some people deal with emergencies, but they can also help other people build their businesses. It all relies on the borrower’s goals and the type of loans they have taken out. A borrower has access to a variety of different bank loans. These are the various loan types that borrowers can obtain from lending organisations.
Different Types of Loans in India
Following are the different types of bank loans in India that are provided by the banks and financial institutions:
Secured loans are ones that are given in exchange for a security. It is a requirement that you have a valid driver’s licence. Lenders are less likely to experience a borrower default while providing secured loans. The lender may sell the asset to recoup its losses if the borrower is unable to repay the loan. Secured loans have lower interest rates than unsecured loans mostly because of this.
They go completely against secured loans. Unsecured loans are given based on the borrower’s current or potential ability to earn income. Borrowers are not required to provide any collateral for unsecured loans. Based on the borrower’s submitted documentation, potential income, and CIBIL history, lenders grant unsecured loans. Unsecured loans put the lender at more risk since, in the event that the borrower defaults, there is no collateral with which the lender can recoup its losses. Lending institutions demand a higher interest rate for unsecured loans because of this.
Types of Secured Loans
Following are the different types of secured loans that borrowers can avail of from the lending institutions:
These are the secured loan products that borrowers use the most frequently. As the name implies, house loans are obtained by the borrower to acquire or build a home. In this case, the house itself serves as the lender’s collateral. Despite the fact that the house is the principal security, depending on the borrower’s profile and the value of the house, the lender could also ask the borrower to provide collateral security. This could be any asset, even a fixed deposit. Home loans are long-term loans with loan terms that can last for up to 25 years. These are typically the most inexpensive and high-ticket loans, with amounts reaching lakhs. Starting interest rates for house loans range from 7% to 7.5% annually. Equated Monthly Installments are required to be paid back on the loan (EMIs). Typically, 80% is the Loan-to-Value (LTV) ratio. It’s a good idea to have a backup plan in case something goes wrong.
Gold owned by the borrowers is offered as proof for gold loans. In this situation, gold serves as a security for the lender, enabling the borrower to use it as collateral to obtain credit from them. The gold belongs to the lender until the loan is paid back. The interest rate for gold loans begins at 7.50% annually. In this case, the majority of lenders demand that the borrowers pay only the interest on the loan balance each month. The borrowers can take back ownership of the gold and repay the principal at any moment. Interest must be paid on the outstanding principal each month until it is paid in full. Moreover, gold loans have a maximum LTV of 90%.
These are the loans that were taken out to buy the car. Vehicles can be two-wheelers, four-wheelers, heavy trucks, as well as both passenger and commercial vehicles. Here, the car serves as the lender’s main security. The lender has the right to seize the vehicle in the event of non-repayment. The introductory interest rate for auto loans can range from 7% to 7.5% per year. The LTV depends with the type of vehicle. For some car loans, the lender may even grant a loan equal to up to 100% of the value of the car.
Loan Against Property
This type of mortgage loan entails the borrowers mortgaging their property to the lender in order to obtain finances. Both residential and commercial properties are eligible for loan against property. Compared to residential loans, loans secured by property have greater administration fees. The lender may use the money for either professional or private needs. The LTV for a loan secured by property can range from 65% to 70%. In addition, compared to home loans, interest rates on loans secured by property are a little higher. Here, interest rates begin at 8% annually.
Loan Against Securities
Frequently, investors buy shares and other securities. Stocks, mutual funds, bonds, and debentures can all fall under this category. These securities may be used as collateral for loans from banks and other financial institutions to the investors. However, because of the volatile nature of the securities, the LTV for loans secured by securities is only 50% of the security’s value. This serves to safeguard the lender against any risk associated with a decline in the security’s value. Also, the interest rate for loans secured by securities varies according to the type of security. It may begin at any rate between 7.50% annually.
When a borrower applies for a title loan, the lender lends money against the borrower’s car. By giving their vehicles to the lenders as collateral security, the borrowers can borrow up to 25% to 50% of the value of their vehicle in this situation. Even though the borrower continues to have possession of the vehicle, the lender has the right to take it in the event of default. These loans can be obtained for as little as 30 days and are typically ultra-short-term loans. The high interest rate of title loans is one of its main disadvantages. The monthly interest rate is typically 25%. This translates to 300% annually.
Non-recourse loans are under the category of secured loans wherein the borrower may offer the lender collateral as security in exchange for the loan. The lender has the right to take possession of the collateral security in the event of a borrower default. One of the main advantages of a non-recourse loan, however, is that the lender cannot take legal action against the borrower if the collateral security does not fully reimburse the lender. After receiving payment from the collateral security, the lender must forfeit the remaining loan balance. The non-recourse loan does not impose any personal obligations on the borrower. A non-recourse loan may have an LTV of anywhere between 60% and 80%.
Loan Against Fixed Deposits
In this case, banks and other financial organisations lend money to borrowers in exchange for fixed deposits. For the lender, the fixed deposits serve as the main security. Furthermore, since a fixed deposit is equivalent to money, banks are not at great risk when making loans secured by FDs. Up to 60% to 75% of the value of the FD may be borrowed against by the borrower. While some banks provide flat interest rates, other banks may have interest rates that are 1% to 2% higher than the FD rate. The current FD rate ranges from 5% to 7.5% annually, depending on the amount and tenure. As a result, it can be argued that loans secured by FD are among the least expensive secured loans.
Loan Against Insurance
One of the most common types of secured loans in India is the loan against insurance. Many people have life insurance plans, but they hardly ever realise that these policies might serve as a security for loans. There must be a surrender value for the insurance policy in order to qualify for a loan against it. The LTV for a loan against insurance ranges from 85% to 90% annually. In this situation, the interest rate may range from 10% to 12% annually.
Working Capital Loans
Banks and other financial organisations offer working capital loans to businesses to help them with their working capital requirements. The amount of the loan, sometimes referred to as Cash Credit, depends on the creditors, debtors, and stock that the company owns, which also serves as the working capital for the company. The working capital limit is determined uniquely by each lending institution. Moreover, the interest rate for working capital loans might begin at 12% annually. For working capital loans, the stock and debtors serve as security; nevertheless, the lending institution may also ask the borrower to provide collateral security.
Types of Unsecured Loans
Following are the different types of unsecured loans that borrowers can avail of from the lending institutions:
In India, these bank loans are among the most popular. Banks and other financial institutions will provide personal loans without any type of collateral security. It is essentially a loan secured by the borrower’s income. Personal loans stand out for their lack of collateral security requirements and lack of restrictions on how the money will be used. The borrower is free to use the borrowed funds for any reason, including travel, marriage, child-related expenses, and medical emergencies. The amount of a personal loan that a borrower may be eligible for relies on both his or her income and CIBIL score. Moreover, personal loans may have interest rates that range from 8% to 10% annually.
Short-term Business Loans
.. “The…. and the a.. and the.. Whenever a company is in need of money, it might apply for short-term business loans. These bank loans are set up to assist firms in navigating sudden financial crises and uncertainty. The eligibility requirements are straightforward, and the amount of the loan that can be issued relies on the business’s profitability and the borrower’s profile. Short-term company loans have interest rates that can range from 1% to 1.5% each month, or 12% to 18% annually. Because there is a danger that the business would lose the loaned money, business loans have higher interest rates than personal loans. The risk in these situations is carried by the lenders.
Education is becoming increasingly expensive. Millions of rupees must be spent if one wishes to pursue a quality education. An education loan offers financial support in these circumstances. The size of the loan is determined by the cost of the school, and the interest rate on student loans can start as low as 8.85% annually. Normal loan repayment starts 12 months after the end of the educational process.
Numerous institutions provide credit cards. These are excellent tools because they allow for credit card spending without actually using currency. The grace period gives the credit card user the opportunity to make a repayment. Credit cards, on the other hand, are typically unprotected. Additionally, if the cardholder wants to, they have the option to turn the unpaid amount into a loan. For the borrower, this becomes an unsecured debt. The fact that credit cards have a very high interest rate is one of their main disadvantages. The annual percentage rate for credit cards can range from 18% to 36%. Additionally, credit cards, like any other loan, have a significant effect on the CIBIL score.