Before we talk about different types of loans, let us understand what a loan is. A loan is the sum of money that you borrow from a financial institution with the assurance that you will pay back the amount in the future within a certain time frame, though with interest. The amount you borrow is the principal and the interest is the amount of extra money you pay for availing the loan.
The amount of the loan offered and the interest paid depends on various factors like income, credit history, and so on. The purpose of availing of the loan helps to decide the type of loan you should opt for.
Knowing the types of loans available in the Indian market is very important. This can help the borrower zero-in on the loan that s/he want. Loans can be classified under three categories on the basis of factors like the amount of risk both the parties are ready to take, consumer credit, and the purpose of the loan.
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Lenders provide two types of loans to consumers - unsecured loans and secured loans - on the basis of risk that the lender and the borrower agree to take.
The loan does not involve any collateral. This means that the borrower does not offer any asset as security against the loan, a reason that explains the higher interest rate of these loans. Examples of unsecured loans are credit cards and personal loans.
Secured loan: The loan involves collateral, wherein the borrower offers an asset as security against the loan. In case of any loan default, the borrower loses the asset to the bank in order to pay the amount. This loan comes with a lower interest rate. Examples of secured loans are home loans, vehicle loans, and business loans.
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There are two types of loans on the basis of consumer credit or the amount of money that you can borrow from the financial institution.
It is not a one-time loan, so you can borrow multiple times without the compulsion of paying the due amount every month. However, with each purchase, your capacity to borrow money reduces. And with each repayment, the available credit increases. An example of this loan is a credit card.
A close-end loan is availed for a specific time period only. A regular payment pattern is a feature of this loan. With every repayment, the loan balance keeps decreasing. In case you wish to borrow more money, you need to apply for a new loan. Examples of closed-end loans are home loans and student loans.
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Now, let us understand various types of loans available in the Indian market that are classified according to their purpose and need.
A home loan is a type of secured loan to buy, build or renovate a residential property. Your property acts as the security against the loan that you avail. The borrower returns the amount to the lender as regular payments or equated monthly instalments (EMI) over a certain fixed period of time called tenure.
The repayment amount of the mortgage loan includes the principal or the money borrowed and the accrued interest. You have to pay the interest to the bank at a certain interest rate for letting you borrow the money.
Even students can apply for the same through various platforms. NUCash.money is one such simple and user-friendly online platform which offers instant personal loans for students to fulfil various needs, including lifestyle needs.
Most neo bank offers loans for a reasonable fee. No hidden costs is involved. The entire process is transparent.
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In the case of an existing home loan, if you need an additional amount, you can apply for another loan under the same category by following the same process.
A home loan helps get tax benefits in a financial year of up to ₹1.50 lakh for principal repayment and up to a maximum of ₹2 lakh for the interest paid on the loan.
As the name suggests, an EMI calculator helps in calculating the estimated monthly/periodic amount to be paid back. Broadly, the calculator helps you in planning your budgets.
Under Section 80E of the Income-tax Act, you can claim tax benefits on the interest paid on education loans availed for higher education. The benefit is available for 8 years or until the interest get paid for, whichever is earlier.
You can claim the deduction if you have taken the education loan for your spouse, children, or for a student for whom you are a legal guardian.
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