When it comes to finances, loans are an excellent way to make your immediate goals a reality. This allows you to make well-informed decisions, especially in times of need. However, proper planning is also needed to ensure your decisions is right.
The other day, I had a friend who asked me if I had any clue about any banks that offer a good loan to fund her immediate education needs. I realized that understanding what types of loans exist would help us in planning our requirements better.
Let’s explore the various types of loans available in India and let us understand their types in a better way:
It is essential that one understand the fundamentals of loans in order to maximize the use of funds.
Loans are primarily advances made by banks and NBFCs (Non-Banking Financial Companies) to customers who promise to repay them within a particular time frame. A loan agreement ideally based on the principal amount and a fixed interest rate. Let’s make it easier to understand this by dividing the types of loans into two categories:
1) Secured Loans
2) Unsecured Loans
1) Secured Loans
Secured loans are trustworthy resources because they utilize your assets as collateral to support your financial goals. Here is a brief overview of the different categories of secured loans:
i. Home loans: Home loans are a secure way to obtain the funds necessary to purchase your ideal home, enabling you to experience the joy of homeownership. Whether you want to purchase land, construct a new home, refinance an existing loan, or make home improvements, home loans can help you reach your objectives.
ii: Borrowing against Property: (LAP) is a common type of secured debt that enables you to leverage your property. Whether the property is residential, commercial, or industrial, using it as collateral grants you access to funds based on a percentage of its value. This freedom from debt enables individuals to pursue their own objectives, such as expanding their business or meeting urgent financial needs.
iii: Insurance policies have a great deal of latent potential as collateral for loans. Plans with age values, such as investments and money-back insurance, can provide access to funds. As long as you adhere to the policy’s terms and conditions, this is your best option.
iv: Loan against Gold: Gold has long been regarded as a highly-prized asset. Gold loans take advantage of this by permitting you to use gold jewelry or currency as collateral for quick cash. These loans are excellent for short-term needs due to the shorter repayment period.
v: Mutual fund and stock loan: To maximize the return on your mutual funds and equities, take out loans against them. Utilize your stocks or hybrid funds as collateral to advance your goal of accumulating wealth.
vi: Through Fixed Deposits: Fixed deposits, which are renowned for their guaranteed returns, can also be used as collateral for loans. For these loans, the value of your fixed deposit serves as collateral. Depending on the lender’s conditions, you can borrow between 70% and 90% of the FD’s value.
Let us now delve deeper into Unsecured Loans.
Unsecured loans offer funds without requiring collateral. Despite the slightly higher interest rates, these loans are adaptable to a variety of financial needs.
i. Individual loans: A personal loan is the most popular type of loan because it enables us to meet our personal requirements with flexibility and convenience. This could include your vacations, home improvement projects, or those last-minute expenses for which you are short on cash. These loans are convenient, but the exorbitant interest rates result from the absence of collateral.
ii. Short-term loans: Short-term business loans can assist entrepreneurs with business expansion, equipment acquisition, and other needs. These loans are tailored to the requirements of businesses and assist them in a variety of fields.
iii: Flexi Loans: Flexi loans alter the manner in which money is spent. These loans allow you to borrow up to a certain amount of money, withdraw it as required, and only pay interest on what you’ve used. The unique structure gives you complete control over your funds and can reduce your EMIs by up to 45 percent.