Indian financial systems offer various loan options to meet diverse financial needs, from purchasing a new car to expanding a business. However, with so many options available, it can be overwhelming to understand the differences between each loan type and choose the one that best suits your needs. This blog provides an overview of the various types of loans available in India, helping you make an informed decision about your borrowing needs from lenders.
Different Types of Loans in India Based on the security provided, loans can be of two types:
1. Secured Loans: A secured loan is a loan that requires you to pledge collateral. The pledged collateral is security in case the borrowers default on repayment. The lender holds the right to seize the collateralized asset to recover the loan dues. Typically, due to this security lying with the lender, the interest rate for the borrower is comparatively lesser.
2. Unsecured Loans: On the other hand, unsecured loans do not require collateral. The loan eligibility and terms are primarily based on your credit score, income, and repayment capacity. Due to the inherent default risk for the lender in an unsecured loan, the interest rate is comparatively higher. You can sell unsecured loans like personal and business loans while earning on the ZET app.
Different Types of Secured Loans in India Now that you are aware of what is a secured loan, let’s see some of its examples-
1. Home Loans: Being an Indian, everyone aspires to own a home. However, it can be difficult to build one without a home loan. Home loans are secured loans that are used to purchase a house or apartment where the property is used as collateral for the loan. The interest rate for a home loan can be comparatively lower than an unsecured loan. It is typically for a long-term period, usually up to 30 years.
2. Car Loans: Car loans are used to finance the purchase of a new or used car. These loans are secured, with the car serving as collateral for the loan. Car loans typically have shorter repayment periods than home loans. A vehicle loan is a more broad term for a loan taken to buy any vehicle.
3. Gold Loans: Unlike the above two examples, a gold loan is not what the name suggests. Gold loans are secured loans that are given against the collateral of gold for almost any purpose. The loan amount is usually a percentage of the gold's value which according to the RBI guidelines can go up to 90% of the gold value. Gold loans are typically short-term loans and have a high-interest rate.
4. Loan against Property: A loan against property or LAP is a secured loan that is given against the collateral of a property. The loan amount is usually a percentage of the property's value. One of the distinguishing features of a LAP is that it can be used for any purpose, such as business expansion or debt consolidation.
Apart from the above, you can avail of loans against your insurance policies, provident funds, fixed deposits, mutual funds, and shares.
Different Types of Unsecured Loans in India Now that you are aware of what is an unsecured loan, let’s see some of its examples-
1. Personal Loans: Personal loans are unsecured loans that you can use for any purpose, such as medical expenses, home renovation, or travel. The interest rates on personal loans highly depend on your creditworthiness and repayment capacity. Business Loans: Business loans can be secured or unsecured and used to finance business operations or a new venture. ZET app allows you to sell personal and business loans through which you can earn up to ₹3,800 on every sale.
2. Education Loans: Education loans are used to finance the cost of higher education, such as tuition fees, accommodation expenses, and books. They are typically unsecured loans and can have a longer repayment period, depending on the amount borrowed. While typically education loans are unsecured, in some cases, lenders can ask for collateral or a guarantor before approving the loan.
3. Agricultural loans: This type of loan is specially offered for farming-related activities. Financial institutions in India provide monetary aid to farmers with varied schemes.
4. Flexi Loans: A unique loan where you can borrow money from a pre-approved credit limit, which can be used as per their requirements. You can withdraw any amount within the credit limit as and when needed, and only pay interest on the amount withdrawn.
Secured vs. Unsecured- which is best for you? Your decision to avail of a secured or unsecured loan should ideally depend on your financial situation and needs. You should keep the following differentiating factors in mind-
You should consider the above factors and choose the best according to your financial capacity, and requirements. You can opt for a secured loan in case you have the resources and want an instant loan and don’t want to wait for an unsecured loan’s longer procedure.
Frequently Asked Questions
Q.1: What is a loan-to-value ratio?
Ans: Loan-to-value ratio (LTV) is a metric for determining the loan amount and the appraised value of the asset being used as collateral for a secured loan. For example, LTV for a gold loan is up to 90%. It means you can borrow up to 90% of the value of the pledged gold.
Q.2: Is there a cap on the loan limit for all types of loans?
Ans: From 2021 onwards, the maximum loan limit has been increased from Rs. 25 lakhs to Rs. 5 crores.