Various loans available in India and when to use them
Read about the different types of loans in India offered by banks and financial institutions. Also get to know how and when each type of loan is used.
Banks and financial institutions in India provide many different types of loans like personal loans, education loans, car loans, etc. A smart and effective way of money management is to know when and how to make use of these loans. Here we look at the different types of loans in India and the situations in which they are used.
1. Home Loan
Home loans are most commonly availed loans. As the name suggests, a home loan is a loan taken for buying a house or property. Every person wishes to have his own home and this option allows them to realize their dream. Home loans are available at reasonable costs and each bank has its own schemes to attract customers.
Home loans can further be sub-divided into the following sub-categories:
• Loans for renovation and repairs
• Home loan for residents
• Loans to purchase land
• Loan against property
• Top-up loans
• Reverse Mortgage Loans
• Earnest Money Deposit (EMD) loans
There may be different variations of the above categories, but these are the basic ones.
Read: Guarantor Loans - What They Are and How They Benefit You
2. Personal Loan
Personal loans are taken to meet any kind of expenses like buying new furniture, electronic appliances, for going on tour or any other requirement. The rate of interest on such type of loans is usually high compared to other loans. Despite the high interest rate, people do like to take this type of loan in order to meet immediate expenses.
Personal loans are again of two types – secured and unsecured
• A secured loan requires you to provide some collateral security against the loan taken
• An un secured loan does not require any collateral security to be provided but usually carries a higher interest rate than a secured loan.
3. Education Loan
An education loan is quite popular among students who wish to pursue higher studies in India or abroad. The repayment of such loans usually begins after the student has completed his course and/or secured a job. A maximum of Rs. 10 lakh is provided as education loan for studying in India, where as this limit is Rs. 20 lakh for studying abroad.
4. Car or Vehicle Loan
As the name goes, a car or vehicle loan is granted for purchasing an automobile – a car, bike or any other vehicle. These types of loans are usually secured where the purchased vehicle itself is the collateral security. The lender or bank or financial institution providing the loan has the right to take the vehicle back and sell it to recover the loan amount in case of default by the borrower. Some lenders offer a vehicle loan without any security but that depends on the credit score of the borrower.
5. Gold Loan
In this type, loan is taken from a bank or financial institution against gold as collateral security. This is one of the fastest and simplest ways of getting a loan. This scheme was at its peak when the gold rates had risen considerably high. But due to recent fall in gold prices, the lenders do not feel gold to be better collateral. The RBI has also recently banned granting gold loans against gold mutual funds and gold ETFs. These loans also carry a considerable amount of risk particularly if it involves Non-Banking Financial Companies (NBFCs).
6. Loan against Bank Fixed Deposits (FDs)
Your bank FD can also be used to take loans. The FD itself forms the collateral for the loan. Usually loans are provided up to 80% of the FD amount. For example, if one has a fixed deposit of Rs. 10 lakh, then he is eligible for a loan of up to Rs. 8 lakh. The rate of interest charged will be 1 or 2 % more than your FD interest rate. This is a fast and secure way of getting a loan.
Related: Do unsecured personal loan serve multi-purpose?
7. Loan against insurance policies
One can either take loans against their insurance policies or use them as collateral for other loans, provided that the policy is eligible for a loan. A loan can also be taken from the insurer himself using such policies.
Loans are given after the policy has been in force for three years i.e. after three years of the insurance policy period. LIC offers loan on your insurance policy at an interest rate of 10%.
8. Loan against Mutual Funds and Shares
Loans are also granted against mutual funds or shares, but the value of these loans are quite less. This is because the fluctuation in values of both these investments will generally be high and to protect their interest against these fluctuations, the lenders do not offer a high amount as loan.
9. Loan from Public Provident Fund (PPF) or Employees' Provident Fund (EPF)
Getting loans from PPF or EPF is somewhat of a lengthy procedure and requires certain conditions to be satisfied such as age, minimum years completed, other proofs, etc. Loan from EPF can be availed only for selected purposes like children's education or marriage, home loan repayment, medical treatment, construction or renovation of home, etc.
10. Loans from unrecognized sector
These types of loans are the easiest and fastest ways of getting funds but at the same time they are also the costliest. The interest rates are very high, in the range of 20 or 30%. The unorganized sector includes local money lenders, chit funds, jewelers who give loans against gold, etc. Such loans are taken by people who are in urgent need of money and do not have any other source to get the required funds.
One must always have control over their financial health and must choose the types of loans in a well planned manner that can be managed smoothly in the future. There is no defined thumb rule as to what percent of your income should go to repayment of loans and EMIs. But as a good practice, it is advised that this percentage should not exceed 60% of your income and includes all the loans you have taken.
Also taking every loan that you're eligible for is not a good idea and often lands you in a financial mess. Due to intense competition among banks and financial institutions, they keep coming up with new and attractive schemes and it is very easy to get tempted and lured into them. It is always wise to use a loan as a necessity rather than for unwanted expenses and luxuries.
Informative and resourceful article about one of the important aspects of today's life. But I must say I missed a few details. It would have been great had the article included the interest rates charged by a few prominent banks. I would have been more happy had the article included the procedure of obtaining the loan and the documents needed.