Published On Jun/16/2024

Loans are capital borrowed from a financial institution or a bank. They charge interest on the money lent for a certain period. For some, bank loans are a way to meet emergencies, while for others, loans act as a catalyst for growth. The purpose and the type of loan availed determine its impact. Various types of bank loans are available for borrowers in India. Here's an in-depth look at the loan types borrowers can access from lending institutions.

Basically, loans in India are of two types – Secured and Unsecured. They are provided by banks and financial institutions.

Secured loans are those loans that are provided against security. The borrowers need to furnish security for availing of secured loans. Lenders face a lower default risk by the borrower in secured loans. If the borrower is unable to repay the loan, the lender can sell the asset to recover its dues. That is why secured loans have a lower interest rate compared to unsecured loans.

Home loans are the most common type of secured loans availed by borrowers. These loans are taken for the purchase or construction of a home, with the home itself acting as security for the lender. Depending on the borrower's profile and the home's valuation, additional collateral security might be required. Home loans are long-term, usually spanning 10 to 25 years, with interest rates starting between 7% to 7.5% per annum. The loan-to-value (LTV) ratio is generally 80%, meaning borrowers can get a loan up to 80% of the property's value.

Gold loans are secured by the gold owned by borrowers. Borrowers pledge their gold with the lender to receive money, and the lender retains possession of the gold until the loan is repaid. The interest rate for gold loans starts from 7.50% per annum. Typically, borrowers only pay the interest each month, with the principal repayable anytime to reclaim the gold. The LTV for gold loans can go up to 90%.

Vehicle loans are taken for purchasing vehicles, including two-wheelers, four-wheelers, and commercial vehicles. The vehicle acts as security for the lender, who can seize it if the borrower defaults. Interest rates on vehicle loans start from 7% to 7.5% per annum. The LTV depends on the vehicle type, with some lenders offering up to 100% of the vehicle's value as a loan.

This type of loan allows borrowers to mortgage their property to access funds. It can be availed against both residential and commercial properties. The LTV for loans against property ranges from 65% to 70%. Interest rates are slightly higher compared to home loans, starting at 8% per annum.

Investors can borrow money against shares, mutual funds, bonds, and debentures. Due to the volatile nature of securities, the LTV is capped at 50% of the security value. Interest rates for loans against securities start from 7.50% per annum.

In title loans, borrowers can use their vehicle as collateral to borrow up to 25% to 50% of the vehicle's value. While borrowers retain possession of the vehicle, the lender can seize it in case of default. These are short-term loans with high interest rates, often around 25% per month (300% per annum).

Non-recourse loans allow borrowers to provide collateral without personal liability for repayment. If the collateral does not cover the loan amount, the lender cannot pursue the borrower for the remaining balance. LTV ranges from 60% to 80%.

Borrowers can access loans against their fixed deposits, with an LTV of 60% to 75%. Interest rates on these loans are generally 1%-2% higher than the fixed deposit rate, making them an affordable option.

Borrowers can use life insurance policies with a surrender value as collateral. The LTV for loans against insurance ranges from 85% to 90%, with interest rates starting from 10% to 12% per annum.

Working capital loans help businesses meet their operational needs. The loan amount depends on the business's working capital components, and interest rates start from 12% per annum. Collateral security might be required alongside stock and debtors.

Unsecured loans are not backed by any collateral. These loans are provided based on the borrower's income, potential earning capacity, and credit history, increasing the lender's risk. Consequently, unsecured loans have higher interest rates.

Personal loans are among the most popular unsecured loans in India. They are granted based on the borrower's income and credit score, with interest rates ranging from 8% to 10% per annum. Borrowers can use the funds for any purpose, including medical emergencies, education, travel, or asset purchases.

Businesses facing financial crunches can opt for short-term business loans to meet urgent needs. These loans have simple eligibility criteria and are disbursed based on the business's profitability and the borrower's profile. Interest rates range from 12% to 18% per annum.

With the rising cost of education, education loans provide necessary financial assistance. Interest rates start from 8.85% per annum, with repayment typically beginning 12 months after the completion of the course.

Credit cards allow users to spend without immediate cash outflow and offer a grace period for repayment. Unpaid balances can be converted into loans, making them a form of unsecured borrowing. However, credit cards carry high interest rates, ranging from 18% to 36% per annum, and significantly impact the borrower's credit score.

Understanding the different types of loans available in India is crucial for making informed financial decisions. Whether you need funds for personal, business, or educational purposes, there's a loan type suited to your needs. Knowing the specifics of secured and unsecured loans, along with their associated interest rates and terms can help you choose the right loan and manage your finances effectively.

Insurance is a legal contract between a person and an insurance business in which the insurer promises to provide financial protection (Sum guaranteed) against unforeseen events for a certain price (premium). The many types of insurance plans available today may be grouped into two groups :

• Life Insurance 
• General Insurance

Some of the kinds of general insurance offered in India are as follows :

• Health Care Coverage
• Automobile Insurance
• Homeowners' Insurance
• Insurance against fire
• Insurance for Travel

Life insurance comes in a variety of forms. The most prevalent types of life insurance policies offered in India are as follows :

• Term Life Insurance 
• Unit-Linked Insurance Plans
• Whole Life Insurance
• Endowment Plans 
• Child Plans for Educations 
• Retirement Plans

Let's take a closer look at the many kinds of insurance policies :

General insurance plans are one of the types of policies that provide coverage in the form of sum assured against damages besides the policyholder's demise. In general, general insurance refers to a variety of insurance plans that provide financial protection against losses caused as a result of liabilities such as a bike, automobile, house, or health. The following are examples of several types of general insurance policies :

Health insurance is a form of insurance policy that covers the costs of medical treatment. Health insurance policies either cover or repay the cost of treatment for any included disease or injury. Various forms of health insurance cover a wide range of medical bills.

It typically provides defence against :

• Inpatient care
• Critical illness treatment
• post-hospitalization medical bills
• Procedures for day-care

A few types of health insurance policies also cover resident care and pre-hospitalization costs. The following are some of the several types of health insurance policies available in India :

Provides coverage to a single person.

This type of insurance allows your complete family to be covered under one policy, which often includes the husband, wife, and two children.

A sort of health insurance that covers a variety of life-threatening illnesses such as stroke, heart attack, renal failure, cancer, and other comparable conditions. When a policyholder is diagnosed with a serious illness, they get a lump sum payment.

These insurance policies are designed for people over the age of 60.

This is a type of insurance that a business provides to its employees.

Also Read: Discover the untapped potential of tax concepts in life insurance for unparalleled financial security.

Motor insurances are forms of insurance that provide financial help in the event that your automobile is involved in a crash. In India, there are several types of motor insurance coverage available, including :

This plan covers privately owned four-wheelers. There are two kinds of automobile insurance plans: third-party insurance and extended coverage policies.

These are forms of automobile insurance that protect privately-owned two-wheelers in the event of an accident.

A sort of automobile insurance that covers any vehicle utilized for commercial purposes.

A homeowner’s insurance, as the name implies, provides full coverage for the belongings and infrastructure of your property against physical destruction or damage. In other words, house insurance protects you from both natural and man-made disasters such as fire, earthquake, tornado, burglary, and robbery.

The following are examples of several types of house insurance policies :

Serves to protect the house's foundation from destruction in the event of a disaster.

Protects the insured residential property from any harm caused by a visitor or third-party while on the premises.

Protection against fires, natural disasters (e.g., earthquakes, landslides, and storms, and floods), and anti-social human-caused activities (e.g., strikes, and riots)

Life insurance policies provide protection against unforeseen circumstances such as the policyholder's death or incapacity. Aside from providing financial security, many types of life insurance plans enable policyholders to optimize their savings by making recurring payments to various equity and debt fund alternatives.

You may get a life insurance policy to protect your family's financial future against the ups and downs of life. The insurance coverage includes a substantial sum that will be paid to your loved ones if something occurs to you. Based on your financial needs, you may pick the length of the life insurance policy, the amount of coverage, and the payment choice. The following are the many types of life insurance policies :

• Term Life Insurance
• Unit-Linked Insurance Plans
• Whole Life Insurance
• Endowment Plans
• Child Plan for Educations
• Retirement Plans

Term insurance is the purest and most inexpensive type of life insurance, allowing you to choose a high level of coverage for a certain period of time. With a low-cost term life insurance policy, you can protect your family's financial future (term insurance plans generally do not have any cash value, and thus, are available at lower rates of premium as compared to other life insurance products.)

If you die within the policy time, your nominees will get the agreed sum Assured, depending on the payment type you choose (some term insurance plans offer multiple payout options as well)

Whole life insurance plans, often known as 'conventional' life insurance plans, give protection for the policyholder individual's complete life (typically till age 100), as opposed to any other type of life insurance that only provides coverage for a set number of years.

While a whole life insurance policy pays a death benefit, it also has a savings component that helps the policy accumulate cash value over time. Whole life insurance policies have a 100-year maturity period. If the insured person survives beyond the maturity age, the entire life insurance policy becomes a matured endowment.

Endowment plans fundamentally give financial protection against life's risks while also allowing policyholders to save consistently over a certain length of time. If the policyholder survives the policy term, the endowment plan matures, and the policyholder receives a lump sum payment.

If something occurs to you (as the life insured), the life insurance endowment policy pays your family (beneficiaries) the whole sum assured.

ULIPs are insurance policies that combine investment and insurance advantages into one contract. A portion of your payment for a Unit Linked Insurance Plan is invested in a range of market-linked equities and debt instruments.

The leftover premium is used to provide life insurance coverage for the duration of the policy. ULIPs provide you with the freedom to allocate premiums to different instruments based on your financial needs and market risk tolerance.

Child plans are life insurance policies that assist you in financially securing your child's life goals, such as higher education and marriage, even if you are not there. To put it another way, child plans combine savings and insurance benefits to help you prepare for your child's future requirements at the appropriate age.

The money obtained on maturity can be utilized to help your child meet his or her financial needs