The various bank loan options offered by Indian banks and financial institutions are as follows:
Secured Loans
Loans that are given in exchange for collateral are known as secured loans. To obtain secured loans, borrowers must provide security. Lenders are less likely to experience borrower default when dealing with secured loans. The lender may sell the asset to recoup its costs if the borrower is unable to repay the loan. The interest rate for secured loans is comparatively lower than that of unsecured loans for this primary reason.
Unsecured Loans
These are totally different from secured loans. Unsecured loans are given based on the borrower’s income or potential for income-earning. Borrowers are not obliged to provide any collateral for unsecured loans. Based on the documentation submitted by the borrower, their potential for income, and their credit report history, lenders offer unsecured loans. Because there is no collateral available with the lender to recoup its obligations in the event of borrower default, unsecured loans put the lender at greater risk. Lending organizations offer higher interest rates for unsecured loans because of this.
Loans are essentially capital borrowed from a bank or a financial institution. These institutions charge interest against lending money for a certain definite period. For some, bank loans are a way to meet emergencies while for others, loans act as a catalyst for growth. It all depends upon the purpose and the type of loans that the borrowers have availed. Various types of bank loans are available that a borrower can access. Here are the different types of loans that borrowers can avail of from lending institutions.
Home Loans
These are the most typical forms of secured loans that consumers take out. As the name implies, house loans are obtained by borrowers in order to buy or build homes. In this case, the house serves as security for the lender. Although the home serves as the principal security, the borrower may also be required to provide collateral security by the lender, contingent on the borrower’s credit history and the home’s appraisal. This could be any kind of asset, even a fixed deposit. Home loans are considered long-term loans, with terms varying from ten to twenty-five years. These are typically the most economical loans, with prices reaching into the lakhs. The starting interest rates for house loans range from 7% to 7.5% annually. Equated Monthly Installments (EMIs) are the required method of loan repayment. Typically, the loan-to-value (LTV) ratio is 80%. This means that 80% of the property’s worth may be borrowed by the borrower.
Loans for Gold
Gold loans are obtained by borrowers using their own gold as collateral. In this case, gold serves as a security for the lender, enabling the borrower to commit the gold to them in exchange for credit. Until the loan is paid back, the lender is still in control of the gold. The interest rate on a gold loan begins at 7.50% annually. In this case, the majority of lenders just demand that borrowers pay the monthly interest on the loan balance. The borrowers are free to return the gold to their ownership and repay the principle at any moment. Interest on the outstanding principal must be paid each month until the principal is paid back. Moreover, gold loans have an LTV of up to 90%.
Auto Loans
These are the loans that were obtained in order to buy the car. Trucks can be two-wheelers, four-wheelers, heavy trucks, and passenger or commercial vehicles. In this case, the car serves as the lender’s principal security. Should you fail to make payments, the lender has the right to take your car. The starting interest rate on auto loans can range from 7% to 7.5% annually. The type of vehicle determines the LTV. In some cases, the lender may even provide a loan for up to 100% of the value of the car.
Takeout Loan Secured by Property
This type of mortgage loan allows consumers to obtain funds from the lender by mortgaging their home. It is possible to obtain a loan secured by either business or residential property. Compared to residential loans, loans secured by property have higher administration fees. The lender may use the money for personal or corporate needs. In the event of a loan secured by real estate, the LTV may range from 65% to 70%. In addition, compared to home loans, interest rates on loans secured by property are marginally higher. Here, the interest rate is set at 8% annually.
Advance Against Securities
Securities and shares are popular investments. This can apply to bonds, debentures, shares, and mutual funds. Banks and other financial organizations are willing to lend money to investors in exchange for these assets. Nonetheless, LTV for loans secured by securities is 50% of the security value due to the erratic nature of the securities. This is done to shield the lender from any negative risk brought on by a decline in the security’s value. Furthermore, the kind of security used as collateral for a loan affects the interest rate as well. It may begin at any point between 7.50% and yearly.
Title Loans
With title loans, the borrower’s vehicle serves as collateral for the loan from the lender. By giving the lenders their cars as collateral security, the borrowers can borrow between 25% and 50% of the vehicle’s worth in this case. The borrower still owns the car, but the lender has the right to take it back if they don’t make payments. These loans can be taken out for as little as 30 days and are typically extremely short-term. The extremely high interest rate associated with title loans is one of their main disadvantages. Typically, the interest rate is set at 25% per month. In other words, it’s 300% annually.
Loans without recourse
Non-recourse loans are a kind of secured loan in which the borrower can offer the lender collateral security in exchange for the loan amount. The lender is entitled to take possession of the collateral security in the event that the borrower defaults. But one of the main characteristics of a non-recourse loan is that, in the event that the collateral security fails to fully reimburse the lender, the lender is not allowed to take legal action against the borrower. Therefore, upon recovery from the collateral security, the lender will forfeit the outstanding balance of the loan. There is no personal obligation on the part of the borrower to repay the non-recourse loan. When it comes to a non-recourse loan, the LTV might range from 60% to 80%.
Advances secured by fixed deposits
In this case, borrowers receive loans from banks and other financial organizations secured by fixed deposits. For the lender, fixed deposits serve as the main form of security. Furthermore, banks do not bear many risks when making loans against fixed deposits because they are equivalent to money. Up to 60% to 75% of the value of the FD may be lent to borrowers as collateral. Regarding interest rates, some banks may have flat rates, while other banks may have rates that are 1%–2% higher than the Federal Reserve rate. The current FD rate varies based on the amount and tenure, and can be anywhere from 5% to 7.5% annually. As a result, one of the most reasonably priced types of secured loans is one secured by FDs.
Loans Against Insurance
One of the most common types of secured loans in India is a loan secured by insurance. Many people own life insurance policies, but very few are aware that these policies can serve as collateral for loans. An insurance policy needs to have a surrender value in order to be eligible for a loan secured by it. In the event of a loan secured by insurance, the annual percentage rate (APR) ranges from 85% to 90%. In this instance, the interest rate may begin at any point between 10% and 12% annually.
Loans for Working Capital
Banks and other financial institutions provide working capital loans to firms in order to assist them in meeting their working capital requirements. Also referred to as cash credit, the maximum loan amount in this case is determined by the company’s stock holdings, creditors, and debtors. These factors also contribute to the business’s working capital. Every lending organization determines the working capital limit using a different method. Additionally, working capital loans have interest rates as low as 12% annually. In the event of working capital loans, the debtors and stock serve as security; nevertheless, the lending organization may also demand collateral security from the borrower.
Various Unsecured Loan Types
The many unsecured loan options available to borrowers from lending organizations are as follows:
Individual Loans
In India, these are among the most sought-after bank loans. Banks and other financial institutions offer personal loans without requiring any collateral. In essence, the borrower’s salary serves as collateral for the loan. The primary characteristics of personal loans are their lack of collateral security requirements and their unrestricted use of borrowed funds. The borrowed funds may be used for any reason by the borrower, including emergencies, marriage, children’s education, asset purchases, and travel. The amount of a personal loan that a borrower is eligible for is determined by both their credit score and income. In addition, the interest rates on personal loans might vary from 8% to 10% annually.
Temporary Business Loans
A firm can experience uncertainties at any time. A company that is having financial difficulties may be able to get short-term business loans. These bank loans are designed to assist companies in navigating sudden changes in the market and financial emergencies. The loan amount that can be disbursed is contingent upon both the borrower’s profile and the profitability of the business. The qualifying requirements are straightforward. Short-term company loans can have interest rates ranging from 1% to 1.5% monthly, or 12% to 18% annually. Because there is a risk of losing borrowed cash in the business, business loans have higher interest rates than personal loans. In these circumstances, the lenders bear the risk.
Student Loans
Education is becoming more and more expensive. Paying lakhs of rupees is necessary for everyone who wishes to pursue a high-quality education. An education loan offers financial support in these circumstances. Study loans have interest rates as low as 8.85% annually, and the loan amount is determined by the cost of the study. Repayment of college loans typically starts a year after the student’s degree is completed.
Credit Cards Loans
A lot of banks provide credit cards. These are excellent tools because they allow spending with a credit card without requiring a physical cash outlay. The credit card holder has time to make payments during the grace period. But credit cards are, by their very nature, unsecured. Moreover, if the credit card holder needs it, they have the option to turn the remaining amount into a loan. For the borrower, this becomes an unsecured debt. The extremely high interest rate associated with credit cards is one of their main disadvantages. The annual percentage rate on a credit card might range from 18% to 36%. Additionally, credit cards have a significant impact on the CIBIL score, just like any other debt.