The loan is the lending of money by an individual or an organization to another individual or organization for a definite period of time. When a person or an organization lends some money to another person or organization, it expects some interest from the borrower in addition to the principal amount. The loan is given for a fixed period of time, however, the time period varies in accordance with the type of loan.
The loans are generally provided by the banks and other Non-Banking Financial Companies in addition to peer to peer to lending in between the individuals. These can be broadly classified into two types, i.e. secured and unsecured loans. When the loan is forwarded against some collateral it is called a secured loan while when it is forwarded without any collateral it is called an unsecured loan. The types of loan are shown in the photo and explained below:
A Secured loan is a type of loan in which the borrower provides some collateral to the lender against the loan. The collateral may be any property, vehicle, gold, any type of deposits, government securities etc. In case the borrower defaults in the repayment of the loan, the creditor can take possession of the asset which was used as the collateral while providing the loan. The creditor (who gives loan) can even sell the collateral to any third party to recover its principal and interest amount for the loan forwarded.
The amount lent in case of secured loan is always less the value of collateral used and this is called as Loan to Value ration i.e. LTV. Suppose someone wants a gold loan against the jewellery and the current value of that gold jewellery is 1 lakh rupees. But if the Loan to Value ratio is 70, then only Rs. 70,000 will be lent as a loan against the jewellery of one lakh rupees. This Loan to Value ratio is decided by the Reserve Bank of India. The Different types of Secured Loans are given as:
When you wish to purchase a house, a home loan can help you to a great extent. It provides you with the financial support and helps you buy the house for yourself and your loved ones. This loan generally comes with longer tenures (20 years to 30 years). The rate offered by some of the top banks in India with their home loans start at 8.30%. Your credit score is checked before the loan request is approved by the lender. If you have a good credit score, there is a fair chance that you will be able to enjoy lower rates of interest with your home loan. As this is a secured loan, your house will be used as a collateral for the loan forwarded to you. A Home Loan is provided for these purposes:
- Construction of a house
- Purchase of Built-up House or flat
- Purchase of Plot/land and Construction of a house on it
- For Repair, Renovation, Addition, Alteration of a house
Once you get a job, it takes time to do some savings. But your desire to buy a car doesn’t take that much time. So, Vehicle loan comes to rescue in this scenario. Buying a Vehicle can definitely instil a great sense of joy and happiness in you. Since credit reports are crucial for judging your eligibility towards any loan, it is good to have a high credit score when you apply for a vehicle loan. The loan application will get approved easily if you have a good credit score and you might get a lower rate of interest associated with the loan.
As the Vehicle loans are secured loans. We are sorry to say that if you fail to pay your instalments, the lender will take back your car and recover the outstanding debt.
When we talk about agriculture, there are various types of loans. But the Kishan Credit Card (KCC) loan is the most preferred as it comes with a lesser interest rate. The objective of the KCC scheme is to provide hassle-free production credit to farmers for meeting the cost of cultivation of both short duration field crops and to maintain long duration horticultural and plantation crops. Revised KCC scheme has short term as well as long term component to meet the following requirements:-
- To meet the short term credit requirement for cultivation of crops
- Post harvest expenses
- Produce Marketing loan.
- Consumption requirement of farmer household
- Working capital for maintenance for farm assets & activities allied to agriculture.
- Investment credit requirement for agriculture and allied activities like pump sets, sprayers, dairy animals etc.
Click here to read about Kishan Credit Card Scheme, if you have not read it yet.
Other Secured Loans
Banks and other Non-Banking Financial Companies also provides loan against some other types of collaterals. These are shown as:
- Gold Loan in which gold is used as collateral
- Loan against Kishan Vikas Patra
- Loan against Fixed Deposit in Bank
- Loan against Insurance Policy, etc.
The opposite of secured loan is the Unsecured loan in which is no collateral is provided by the borrower against the money lent to him/her. Generally speaking, the secured debt may attract lower interest rates than unsecured debt because of the added security for the lender. However, the credit history, ability to repay, and expected returns for the lender are also factors which affect the interest rate. The most important types of Unsecured loans are as:
Most of the banks offer personal loans to their customers. The money can be used for any expense like paying a bill or purchasing a new television. Generally, these loans are unsecured loans. The lender or the bank needs certain documents like proof of assets, proof on income, etc. before approving the personal loan amount. The borrower must have enough assets or income to repay the loan.
You must remember that the rate of interest associated with these loans can be on the higher side. The tenure of these loans is not that long. So, if you borrow a big amount, it can be difficult for you to repay without planning your finances properly. Personal loans can prove to be of great help when you wish to take a small loan and repay it as soon as possible.
Credit Card Loans
Credit Card is a type of short-term loan provided by the bank. A Credit Cardholder needs to pay the bill at the end of the month and Credit Limit varies person to person and keeps on changing depending on whether you pay on time or not. When you are using a credit card, you must understand that you will have to repay for all the purchases you make at the end of the billing cycle. Credit cards are accepted almost everywhere, even when you are travelling abroad. As it is one of the most convenient ways to pay for the things you buy, it has become a popular loan type.
In addition to benefits, there are pitfalls associated with this type of loan. You must understand that there is a high amount of interest on the amounts you borrow on your credit card. If you do not pay your credit card bills on time, the interests will keep piling and might be difficult for you to manage your finances with the rising outstanding balance. But if you use a credit card wisely and clear all your debts on time, it can definitely prove to your best friend in your pocket.
Bank Overdraft Facility
Overdraft is also a short-term loan which is offered by the bank to its Current Account holders. The current account holder can withdraw money from the account even if there is no money in there account at some point of time. Of Course, the bank charges some fees for this overdraft facility.
The Overdraft facility is also provided by banks to Jan Dhan Account holders. Recently, the government has increased this Overdraft limit under the Jan Dhan Accounts to 10,000 rupees from the 5,000 rupees previously. The age has also been increased to 65 years form the 60 years to avail this facility. However, under the Pradhan Mantri Jan Dhan Yojana, the overdraft facility is provided to only one member of the family and preferably women.
Education loan is provided to nurture ambitions & aspirations for higher education needs in India or abroad. If you wish to get a higher education in a reputed university in a different country or even within the country, education loans can help you a lot. These loans are opted by students who wish to study further but need financial support for pursuing the courses. An education loan covers expenses like college/university fees, library charges, travel costs related to their course, etc.
In order to be eligible for an education loan, you must submit all the required documents including an invitation letter from the university, educational qualification certificates, etc.
The Education loan also comes under the Priority Sector Lending by the banks. A loan of up to 10 lakh rupees is provided to study in India while the limit is 20 lakh rupees to study abroad. One who avails the Education Loan doesn’t need to pay instantly after the completion of the course. The loan is to pay back in instalments after 6 months of the completion of the course or one year after getting the job, whichever is earlier. The duration to pay back the loan can be up to 15 years depending upon the loan amount.
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