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5 Min 28 Jun 2022
types of loans
Highlights
  • What is a Loan?
  • Types of Loans in India
  • Types of Secured Loans
  • Types of Unsecured Loans

What is a Loan?

A loan is an amount borrowed from a financial organisation to be repaid in monthly installments within an agreed period. They are designed to help address expenses and bridge the gap you may experience in terms of funds. Therefore, getting acquainted with all the different types of loans is important before you avail of any one of them.

The different types of loans in India are classified based on two factors, namely secured and unsecured. Read on to learn about them.

Different Types of Loans in India  

From addressing medical, social, or even personal expenses, loans have proved to be an essential tool in times of financial contingencies. In present-day India, those in dire need of funds will have several loan options to select from, to best address their financial needs. Knowing the different types of loans available in India is not just for academic purposes; should you ever need a specialised loan – you will know which to pick to maximise the benefits of the credit tool.

The two broad categories of loans available in India are the following:

  • Secured Loans

These are the types of credits where you need to collateralise your property or jewellery when applying for a loan. In this type of credit, lenders have a low risk of default from the borrower as they can always sell off the collateral to recover the loan amount.

  • Unsecured Loans

For this type of credit, borrowers do not have to collateralise their property or jewellery. However, it is mandatory to have a ​​good CIBIL score, at least beyond 750. Otherwise, lenders might not approve their loan application. 

​Different Types of Secured Loans in India

Secured loans are sanctioned against collaterals or a security. Borrowers are expected to offer their assets as collateral to the financial organization they are borrowing from to receive the loan amount they desire. These assets stand as security for the lender if the borrower fails to repay the loan.

Following are some of the popular secured loans you can avail of:

  1. Loan Against Property

    A Loan Against Property is popular and often availed. Borrowers pledge their property against which they stand to receive sizeable sanctions that they can use to address housing or business-related expenses. 
  2. Home Loan

    Home Loans focuses on helping you purchase a property by extending sizeable funds. In the case of a Housing Loan, the collateral in question is the property being purchased. The ownership of the property is transferred to the borrower upon full repayment.
  3. Gold Loan

    Gold loans allow borrowers to pledge gold jewellery in exchange for funds. Typically, a gold loan is utilised to meet short-term needs.
  4. Loan Against Mutual Funds and Shares

    Loans against mutual funds and shares offer similar provisions, where one uses their mutual fund investments or shares as loan collateral.
  5. Loans Against Fixed Deposit

    Your fixed deposit can also come to your rescue when you want to take a loan from any financial organization. The loan can be 70–90% of the fixed deposit value, and the loan tenor will last as long as the fixed deposit tenor lasts.

​Different Types of Unsecured Loans in India

Unsecured loans do not require any collateral for loan approval and disbursal. Such loans are extended based on one’s financial history. So, if you ever want this type of loan, you must ensure that your credit profile is healthy.

  1. Personal Loan

    A personal loan can be availed of to cater to your individual needs. Due to its vast range of usage and no end-use restrictions, a personal loan is one of the most popular unsecured loans. However, given its unsecured nature, the interest rate for a personal loan is relatively high compared to secured loans.
  2. Business Loans

    Short-term business loans are quite common in India and come in different forms, such as loans for traders, manufacturers, service enterprises, working capital loans, and machinery loans. These are designed to help business owners fulfil their urgent financing needs.
  3. Education Loans

    Education loans act as monetary assistance for students who need to meet expenses associated with higher studies. The student is the primary borrower, while the parents or guardians serve as the co-applicants.
  4. Vehicle Loans

    Vehicle loans enjoy immense popularity in India, given the demand for automobiles in the country. These loans come at competitive interest rates with easy-to-meet parameters.
  5. Agriculture Loans

    Agriculture loans are extended to those who seek to fund their seasonal farming activities, such as the purchase of land or machinery, horticulture projects, and more. The repayment tenor and eligibility criteria differ depending on the end use of the funds. 
  6. Flexi Loans

    ​​Flexi loans are handy for those individuals who prefer a more flexible disbursal plan, wherein, they borrow how much they need, and pay interest only for the amount consumed. This is cost-effective and a choice for many borrowers who require cash at a short notice. ​ 

  7. ​​Credit Card Loans

    ​​Credit card loans are essentially loans offered against one’s credit card. The loan repayment is usually linked to the user’s monthly credit card bill and is disbursed without hassles – as the lender will already have all the required information. ​ 

​​Read Also: Hybrid Flexi Loan v/s Personal Loan 

The Differences Between Secured and Unsecured Loans

Point of Difference 

Secured Loans 

Unsecured Loans 

Collateral  

Collateral is required 

Collateral is not required 

Interest Rates 

Interest rates are comparatively lower than unsecured loans 

Interest rates are higher compared to secured loans 

End-usage Restrictions 

There are restrictions on end-usage with the exception of certain loans (gold loans, loans against mutual funds or FDs) 

Usually, there are no such restrictions except for unsecured education loans 

Maximum Loan Amount 

A certain percentage of the collateral’s assessed value. 

It is usually based on the applicant’s income, credit score, loan type and other eligibility parameters. 

Credit Score Impact 

Medium to low-impact 

The impact is very high

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Frequently Asked Questions

Frequently Asked Questions

​​​​Personal loans typically have higher interest rates compared to other types of loans due to their unsecured nature. Since personal loans are not backed by any collateral, such as property or assets, lenders assume a higher level of risk. To compensate for this risk, lenders often charge higher interest rates on personal loans.The absence of collateral means that if a borrower defaults on a personal loan, the lender has no specific asset to recover the outstanding amount. This increases the risk for the lender and leads to higher interest rates as a way to mitigate that risk​​​

​Yes. In order to meet your business funding requirements, you can take a cash loan. Cash loan refers to a loan which is received by a borrower in cash. ​These loans are typically unsecured, meaning they do not require collateral such as a house or car to secure the loan.​ On the other hand, you can also apply for a business loan online. ​However, it's important to note that cash loans often come with high interest rates and fees, making them an expensive form of borrowing. ​​

​​​Yes, it is possible to get a loan if you are self-employed in India. Many banks and financial institutions offer loans specifically designed for self-employed individuals. However, the eligibility criteria and documentation requirements may vary from lender to lender.​ ​It's advisable to contact various banks or financial institutions to understand their specific requirements and evaluate the loan options available to you as a self-employed individual in India. Additionally, maintaining a good credit history, strong financial statements, and a well-documented business can improve your chances of obtaining a loan.​​

​​​A demand loan is a type of loan that allows the lender to request full repayment at any given time. Both the lender and the borrower are aware of this condition from the beginning.​ ​This arrangement offers benefits to both parties involved. Lenders appreciate the ability to demand repayment, whether it is to pursue alternative investments or to recover the principal amount. Borrowers, on the other hand, value the convenience and flexibility that demand loans offer. They can repay the loan, either in full or in part, at any time without incurring any penalties.​​​

​A term loan is a financial product that involves the lending of a specific amount of money to an individual or business for a predetermined period of time, typically ranging from one to ten years. The borrower is required to repay the loan amount along with the agreed-upon interest within the specified term.​ There are four types of term loan – short-term term loan, intermediate term loan, long-term term loan and special commitment term loan.

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