Different types of Loans
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Personal Finance
- Swati Tripathi
- 2022-12-10
- 03 min read
#types of loans

With banks from all over keep promoting their loans and advances, the interest rates can be attractive… only when you have read enough. For that, you need to know everything about the various loans offered by banks.

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Firstly, why do you need a loan?

Not all purchases can fit into our pockets. They cannot be avoided either. This is where loans help, where you borrow from a bank and pay for the purchase. Then, you repay the amount to the bank in monthly instalments (EMIs) with interest.

Based on your purpose and the utility of the finance, there are several loans provided.

Let’s break them down:

Loans can be secured (against an asset) or unsecured.

Secured loans require you to provide an asset as security to the lender. This helps the banker secure his position in the event the borrower is unable to repay in full.

Unsecured loans require no such things. Since unsecured loans are riskier, the bankers charge a higher rate of interest on the same. To get an unsecured loan, you need a solid financial position and a strong credit score. The banker needs to trust that you are fully capable of repaying the amount in full.

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Types of secured loans:

1.   Home loan:

A home loan provides the finance needed to purchase your dream home. But… a loan for purchasing new land or an apartment (new or on resale) is not the only thing covered. Say you want to renovate your house or expand it and the cost for it is huge – that too, is covered in a home loan.

2.   Loan against property:

This loan is available when you already own a property and want to finance another goal through it. You mortgage it with the bank to have substantial funds for financing your personal or professional goals.

In a loan against property, you cannot get the full amount financed. Usually, about 60-70% of the amount is imbursed by the bank.

One needs strong negotiation skills to get the best deal with the bankers here.

3.   Loan against securities:

Just like properties, you can also give your financial securities as security against loans. You can get a loan against shares, mutual funds, and even insurance policies.

Here too, you can usually fetch around 70% of the value of the securities pledged.

Types of unsecured loans

1.   Personal loans

This is one of the most popular borrowings in the banking sector. Used for personal purposes, these are high-interest loans and usually for the short to medium term. Personal loans are not that easy to get. One not only needs a high income but also proof of long-term stability to give some kind of assurance to the banker.

2.   Business loans

For an entrepreneur, it is not always easy to invest large amounts of money from their own pockets. They cannot always rely on their circle either. Here is where banks help with business loans to finance multiple needs for the short term.

This loan can be used for working capital needs or purchasing machinery/operational equipment, which of course, needs a mention when borrowing.

Most banks also provide lucrative schemes for MSMEs (Micro, Small, and Medium Enterprises) and women entrepreneurs to boost business growth.

3.   Education loans:

As a student, you would know that specialized courses, and education in esteemed institutions doesn’t come easy – even financially. But that shouldn’t stop you from pursuing that, right?

This is why banks provide education loans at a comfortable interest rate. An education loan can finance a full-time course, or even a part-time or vocational course. The primary borrower here is the students, with the parents or guardians as the secondary borrowers.

Once the course is completed, the student is responsible to repay the said loan.

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The last word:

Loans generate most of the revenue for banks through interest. That’s what their business is. But to make sure you’re not at a complete loss as a borrower, be very thorough with all the terms and conditions. Negotiate the best deal to attain a win-win situation.

The interest rates are not based on only market rates. The tenure of the loan, the utility, your income ability, your long-term stability, and many other factors are considered before deciding the rate given to you. Make sure you’re painting a strong picture.

Not only would this impact your current finances, but also set the path for your future borrowing needs. Weigh all the pros and cons of the loan you’re trying for before applying.

Always repay on time since this also shapes your long-term financial health. This will help you not fall into a debt trap.

Loans are not always a bad call. You need to be well informed to decide.

Want to know if you should borrow now or not? Here, read this: To loan or not to loan


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