15 Types of Loans in India-Choose the best one
Credit or loan is the best form of financial tool to improve an individual’s financial situation. This loan helps a person to pay for goods and services that cost him more than he can afford. This means one falls in the trap of loans or credit when they enjoy something that is beyond his financial affordability. Though it’s not always true that human’s greed lures towards the trap of loans. There are some needs indeed like Housing loan, education loan and alike.
In this article, I will discuss 15 types of loans in India, what are the various types of loan in India, types of loan from Bank.
Before, going into details on 15 types of loans, first, you must know some key points on availing loans.
⇒Key points to remember for choosing the best types of loan that suits you most:
- Financial experts suggest that one should keep himself away from the lure of loans as far as possible;
- Experts warn that one’s total loan burden should not exceed 50% of his monthly net income.
- A loan should be taken only when you really need this. Unnecessary loan burden must be avoided;
- You should repay the loan within the schedule period of time, otherwise, it may hit your credit score;
- As per financial prudence, one should repay the higher interest rates bearing loans first without fail and then lower interest rates loans. This will improve your financial situation drastically;
- You should avail secured loans first since it offers little bit lower interest rates than that of unsecured loans;
- One needs to avail short term loan for meeting emergency needs, that will reduce his interest outgo significantly;
- Types of loans varies from one bank to another and so does the interest rates;
- A borrower having good credit history should bargain with banks for offering low-interest rates loans;
- Avoidance of overusing of credit cards, as it lures for overspending especially for young persons;
- Always avail a loan for the exact amount of your needs and don’t over borrow.
A loan is meant for meeting your specific needs. However, it should not be construed as the only means to do away with other debts. There are different types of loans available in India. One should look into the following options before taking any decisions.
Types of loans – No.1: Credit Card Loan
- No documents are required;
- Easy source of credit at fingertips;
- Credit limit can be enhanced with ease;
- High-interest rates than any other form of loans;
- Penalty charges are levied on failure to repay within schedule time.
Types of loans – No.2: Bank Overdraft
Bank overdraft is another form of short term loan given by banks. Under this option, a person is allowed to borrow up to a certain predetermined amount or limit set in his current account by the bank. This amount is to be repaid on demand. Generally, a bank overdraft facility is taken for a few days only. This type of loan is popularly known as swinging account due to its nature.
Businessmen do prefer this sort of short term financing most as this helps them meet their short term needs.
- One has to pay interest only for what he borrows. Therefore, this loan is cheaper;
- Bank overdraft facility is very flexible and one may ask the bank for extended overdraft facility for the short term it requires;
- May have to incur high interest if the overdraft is continued for a longer period which may lead to permanent interest burden on you.
Types of loans – No.3: Housing/Home Loan
For the middle and lower middle-class people, this home loan acts as an integral part of their lives. Home loan is given by banks to buy a home or housing property. This loan is very popular amongst the Indians due to its low-interest costs and tax benefits. Banks offer home loans in two variants like Fixed interest and Variable interest. It’s always preferable to opt for variable interest rate loan as it is cheaper in the longer period.
Though this loan is quite cheaper, it is not advisable to over-borrow. Sometimes, your total interest repayment during the entire loan period may be more than your actual loan amount. Also, it is advisable to borrow home loan for shorter tenure as far as possible depending on your financial ability to repay a bigger monthly amount.
- If your income level is high you can avail a bigger amount.
- This loan offers flexibility in repayment;
- You can avail tax benefits on interest u/s 24(b) and for principal repayment u/s 80C;
- Home loan is quite cheaper than other forms of loans;
- Prepayment or foreclosure of the loan is allowed without any penalty or charges after one year from the first EMI payment;
- Until you repay the full amount, your property is retained as collateral security to banks;
- Longer repayment tenure cost you more and more interest outgo.
Types of loans – No.4: Higher Education Loan
If you want to pursue higher education either in India or abroad and you need money for this, you can ask a bank for a higher education loan or student loans. Some banks provide education loans for vocational courses as well. This is also important to know that some banks offer discounts or lower interest rate loans for female student or borrower on education loans.
- For study in India– Generally, banks allow education loan for a maximum of ₹ 10 Lakh only. For this case, your own contribution or margin money will be 5% of the total cost.
- For study abroad- Usually, banks offer ₹ 20 to ₹ 30 Lakh with minimum 15% margin of the total cost i.e. for your own contribution.
- For Indian high stature courses– For high standard Indian courses like IITs, IIMs studies banks generally offer education loan up to ₹ 30 Lakh with minimum 5% margin of the total cost i.e. for your own contribution.
- This loan is quite cheaper than personal loans;
- Flexibility in repayment of loans;
- No collateral is required for education loans up to ₹4 Lakh;
- Repayment starts after 1 year from the end of the course or after 6 months from getting the job, whichever is earlier;
- The tax rebate is available for up to 8 years from the beginning year of the repayment;
- No foreclosure charges are levied for this type of loan;
- No tax benefits on repayment of principal amount.
Types of loans – No.5: Car Loan
If you want to buy a car you can opt for a car loan. Depending upon your income level, vehicle loan is easily available in India. However, banks generally disburse 85% to 90% of the car value. The remaining amount you need to provide as a downpayment.
What is the interest rate?
- Repayment period is between 1 year to 7 years maximum;
- Until the full loan amount is repaid, the vehicle remains hypothecated to the loan disbursing bank.
Types of loans – No.6: Personal Loan
What is the interest rate?
- Lesser documents are required to avail such types of loans;
- Sometimes loans are disbursed within a few hours from the application;
- No such collateral security is retained for this loan;
- The interest rate is very high i.e. this loan is very costly;
Types of loans – No.7: Gold Loan
- This loan is quite cheaper as compared to personal loans;
- Your physical gold will remain at the custody of the banks until the full loan amount is repaid;
Types of loans – No.8: Consumer Loan
- No documentation is required;
- Easily accessible for the purchase of consumer durable or household goods;
- There is no collateral required for this loan;
- High-interest personal loan;
Types of loans – No.9: Mudra Loan
- The interest rate on this loan varies from bank to bank;
- Lesser interest is being charged by Govt. owned banks;
- Due to an unsecured loan, most of the banks are reluctant to offer this loan to businessmen.
Types of loans – No.10: Working Capital Loan
- Fast loan disposal;
- This loan is offered at high interest rates;
- Banks offer this working capital loan at very low repayment tenure.
Types of loans – No.11: Loans against Mutual Funds/ Shares
If you have an investment in mutual funds or shares and in need of money, you can avail this loan against mutual funds and shares.
- The units of mutual funds or shares are held as collateral security till full loan repayment;
- A dividend on shares will be paid on full repayment of the loan.
Types of loans – No.12: Loan from PPF
Loan from PPF is one of the most conservative ways to borrow money. But withdrawal from PPF has some pre-conditions. Like withdrawal can be made only after 2 years from the end of the year in which initial subscription was made.
How much can you avail?
25% of the investment that stood to the credit of your account at the end of the second year immediately preceding the year in which the application for the loan was made.
- Repayment of the loan is to be done within a maximum of 36 months;
- No collateral security is required for this loan;
- If you can not repay the entire loan within 36 months, you have to incur additional interest@ 6% p.a as a penalty.
Types of loans – No.13: Loan against LIC Policy
This loan against LIC policy is offered by banks against the LIC policy you own. Banks retain your LIC policy as the colatteral until the full loan is repaid.
- Fast loan disposal;
- Only eligible LIC policies are entitled to get these types of the loan.
Types of loans – No.14: Loan against Fixed Deposit
If you have an investment in Fixed deposits and you are in urgent need of money, then don’t worry you can avail a loan against this fixed deposit. Your FD is retained by the bank as collateral security for this loan.
- Fast loan disposal;
- On defaulting to repay the loan, the bank may encash your FD to close the loan.