A loan is essentially money borrowed with a promise of return within a specific time period/tenor. The lender decides a fixed rate of interest that you must pay on the money you borrow, along with the principal amount borrowed. Let us take a look at the different types of loans that are available in India.
Types of loans
There are various types of loans available in India, and they are classified based on two factors:
– Whether they require collateral
– The purpose they are used for
Based on whether they require collateral, loans are classified into secured loans and unsecured loans. Let’s take a look at each type.
I. Secured loans These are loans that do require collateral, i.e., you have to provide an asset to the lender as security for the money you are borrowing. That way, if you are unable to repay the loan, the lender still has some means to get back their money. The rate of interest of secured loans tends to be lower as compared to those for loans without collateral.
Types of secured loans
1. Home loan
Home loans are a secured mode of finance, that give you the funds to buy or build the home of your choice. The following are the type of home loans available in India:
Land purchase loan: Purchase land for your new home
Home construction loan: Build a new home
Home loan balance transfer:Transfer the balance of your existing home loan at a lower interest rate
Top up loan: Can be used to renovate an existing home or have the latest interiors for your new home
Note that while buying a new property/home, the lender requires you make a down payment of at least 10-20% of the property’s value. The rest is financed. The loan amount disbursed depends on your income, its stability and current liabilities among others.
2. Loan against property (LAP)
Loan against property is one of the most common forms of a secured loan where you can pledge any residential, commercial or industrial property for availing the funds required. The loan amount disbursed is equivalent to a certain percentage of the property’s value and varies across lenders.
While some lenders may offer an amount equivalent to 50-60% of the property’s value, others may offer an amount close to 80%. A loan against property helps you unlock the dormant value of your asset and can be used to satiate personal life goals such as higher education of children or marriage. Businesses use a loan against property for business expansion, R&D and product development among others.
3. Loans against insurance policies
Yes, you can also avail loans against your insurance policy. However, note that all insurance policies don’t qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value can be used to avail loans.
Thus, you can’t avail a loan against a term insurance plan as it doesn’t have any maturity benefits. Also, loans can’t be availed against unit-linked plans as the returns aren’t fixed and depends on the performance of the market. It’s essential to note that you can opt for a loan against endowment and money back policies only after they’ve acquired a surrender value. These policies acquire a surrender value only after paying regular premiums continuously for 3 years.
4. Gold loans
For the longest time, gold has been one of the most favoured asset classes. The organized Indian gold loan industry is expected to touch Rs.3,101 billion by 2019-20, according to a KPMG report, thanks to flexible interest rates offered by financial institutions.
A gold loan requires you to pledge gold jewellery or coins as collateral. The loan amount sanctioned is a certain percentage of the gold’s value pledged. Gold loans are generally used for short-term needs and have a short repayment tenor compared to home loans and loan against property.
5. Loans against mutual funds and shares
An ideal vehicle for long-term wealth creation, mutual funds can also be pledged as collateral for a loan. You can pledge equity or hybrid funds to the financial institution for availing a loan. For doing so, you need to write to your financier and execute a loan agreement.
Your financier then will write to the mutual fund registrar and a lien on the certain number of units to be pledged is marked. Typically, you can get 60-70% of the value of units pledged as a loan.
Similarly, with shares, financial institutions create a lien against shares against which the loan is taken and the loan value is equivalent to a percentage of the value of the shares.