LOANS
What Is a Loan?
A loan is an amount borrowed from a lender with the promise to return within a specific time period. The lender decides a fixed rate of interest on the amount you borrow, and that must be paid along with the principal amount you borrowed. The lenders are usually Banks, NBFC’s and other financial institutions.
When we talk about LOANS! Why will one give loans? Simply, they make a small amount of money by lending you money for a fixed interest rate for a time period! Does taking loan a good idea? It depends! If you borrow the loan gamble then that is bad, but if taking loans for any use cases like your daily needs and lifestyle than it is not a problem. When you take a loan, you should also be aware of how you end up paying to finance institutions at the end of tenure. Suppose if you take a loan of 25 lakh at 6.5% interest for 25 years, you end up paying 50 lakh at the end of the tenure. Yes the inflation eats most of the value of money as today one lakh is just 92 thousand next here due to inflation rate in India.
Categories In Which Loans Are Offered
In India, majorly there are two types of loans, one is secured and another is unsecured which are offered from financial institutions. Let’s look into the categories of loans available for retail people! And also understand on what basis do they provide LOAN? Which are loans best suits us!
Secured Loans:
These are the loans that require collateral that you should provide as security to the lender for the money you are borrowing. That way, the lender has that security to get back their money In the situation when you failed to repay the borrowed money. So here the interest rate automatically goes down, that means you get the loan amount at very low interest.
I. Different types of Secured Loans:
Home Loan
Home loans are secured loans which are offered by financial institutions to borrowers to buy or construct their own home of choice. The borrowers can apply for loans to purchase a new home, to build a new home, or to renovate an existing home.
The only thing financial institutions or lenders require is that borrowers have to pay a down-payment of 20% of property value. You can opt for longer repayment tenure to avoid financial difficulty. If you take longer tenure to repay the borrowed money, you end up paying more interest. What I am saying is when you buy any loan, please check the tenure period and how much you will end up paying the money at the end of tenure.
Loan Against Property
LAP is a secured loan where you can get a loan against your properties that may be residential, commercial, Industrial from the financial institutions. The loan amount is evaluated as a certain percentage of your properties current value.
The LAP loan unlocks the value of your property and by that you can invest the amount in other assets or start a business for more profits. Usually, the LAP loan value given by a financial institution is up to 70 – 80 % of your property value.
Auto Loan/Vehicle Loan
Vehicle loans are the loans taken by borrowers from financial institutions to purchase private or commercial vehicles. Here the collateral is the vehicle itself against which loans are issued for a specific rate of interest for a period of time.
The interest rate for the loan amount is around 7-9% in India. Which are good for one to fulfill their short tern financial goals. But remember, you can take vehicle loan as an investment for your business or just for your lifestyle. Specially when you’re buying a vehicle for lifestyle, you should make that decision that can you afford that vehicle at that time.
Loans against MF and Equity
These are secured loans where you can get loans against your mutual fund units and equity shares. Here, usually you need to write for any financial institution for a loan with agreement. After that, the lender writes to the mutual fund register to claim/lien specific number of units of mutual fund or shares respectively to be pledged.
In this case, typically you can get a loan up to the value of 80% the value of your asset in mutual fund or shares at current valuations.
- Loan Against FD
When we talk about FD, we usually expect a rate of return on our investment, But do you know? We can also get loans on your FD investment that are typically up to 90% the value of your FD investment.
- Gold Loan
In India, for centuries, gold has been the most favorite asset to invest for Indians. The good part of gold is you get loans against it by pledging it in banks. I remember my parents doing that to handle financial situations. Gold is a very good asset which server as investment also you can get loans against them everywhere.
Typically, Gold loan wants you to pledge the gold to a financial institution for loan amount at a particular interest rate and this typically for a short period of time when compared to home loan and vehicle loan.
- Loans on Insurance Plan
Insurance loans are a type of secured loan that you can get a loan against your insurance. Generally not all insurance qualify for this, only the insurance policies which have maturity value hold good for loans. Suppose consider the term life insurance which do not have value after the maturity period, this type of insurance doesn’t hold good for loans against insurance.
II. Unsecured Loans:
These loans don’t require any collateral. The lender lends you money based on previous activities/association, Your credit score and history in financial institution. It’s important to have a good credit score to avail these loans. The trust, the good credit score help you to get less interest loan from financial institutions. For unsecured loans, financial institution’s interest charge will be on higher side.
Different types of Unsecured Loans:
Personal Loan
Personal loan is an unsecured loan which is offered by financial institutions. The catch here the personal loans are offered at higher interest as the loan comes under an unsecured financial loan. But a good credit score will definitely help you get the loans at reasonable interest.
With the personal loans you can generally use it for your sudden expenses, home renovations, child education, child marriage, and travel expenses. The interest rate for personal loans is between 11-20 % yes these are so expensive please be aware of that don’t make bad decisions think twice before going into debt.
Credit Card Loan
Credit card loan is again an unsecured loan which is pre-approved as you already have a credit card which was issued by a financial institution. As all your personal and financial information is with them as documents you need not go through from scratch for applying a loan, So they are considered pre-approved.
In credit card loans, The loan amount gets deducted from your available credit limit and is eventually transferred to your bank saving account. Thereafter, you can use the amount to your requirement.
Education Loan
When you are planning for higher studies, especially out of the country and aiming for top universities for better job opportunities and exposure, you can go with the education loans. The loan covers entirely including colleague fee, accommodation and exam fees. The best part of the loan is you are the primary borrower and your parents are co-applicants, that way there will be less burden for your parents. Once you plan to study outside the country, it is important to get the job and work in that country for period of time as you will be in debt of education loan. Typically, the education loans interest rate is between 9-12%, which on the higher side comparatively.
Difference between Secured and Unsecured Money
SECURED | UNSECURED | |
Collateral Required | Yes | No |
Loan Amount | Based on value of collateral | Credit Worthiness |
Loan Term | Longer Term | Short Term |
Interest Rate | Lower | Higher |