A loan is essentially money borrowed with a promise of return within a specific time

period/tenor. The lender decides a fixed rate of interest that you must pay on the money you
borrow, along with the principal amount borrowed. Let us take a look at the different types of
loans that are available in India.

Types of loans

There are various types of loans available in India, and they are classified based on two factors:
- Whether they require collateral
- The purpose they are used for

Based on whether they require collateral, loans are classified into secured loans and unsecured
loans. Let’s take a look at each type.

I. Secured loans These are loans that do require collateral, i.e., you have to provide an asset to
the lender as security for the money you are borrowing. That way, if you are unable to repay the
loan, the lender still has some means to get back their money. The rate of interest of secured
loans tends to be lower as compared to those for loans without collateral.

Types of secured loans

1. Home loan

Home loans are a secured mode of finance, that give you the funds to buy or build the home of
your choice. The following are the type of home loans available in India:
Land purchase loan: Purchase land for your new home
Home construction loan: Build a new home
Home loan balance transfer:Transfer the balance of your existing home loan at a lower interest
rate
Top up loan: Can be used to renovate an existing home or have the latest interiors for your new
home

Note that while buying a new property/home, the lender requires you make a down payment of at
least 10-20% of the property’s value. The rest is financed. The loan amount disbursed depends
on your income, its stability and current liabilities among others.

2. Loan against property (LAP)

Loan against property is one of the most common forms of a secured loan where you can pledge
any residential, commercial or industrial property for availing the funds required. The loan
amount disbursed is equivalent to a certain percentage of the property’s value and varies across
lenders.

While some lenders may offer an amount equivalent to 50-60% of the property’s value, others
may offer an amount close to 80%. A loan against property helps you unlock the dormant value
of your asset and can be used to satiate personal life goals such as higher education of children or
marriage. Businesses use a loan against property for business expansion, R&D and product
development among others.

3. Loans against insurance policies

Yes, you can also avail loans against your insurance policy. However, note that all insurance
policies don’t qualify for this. Only policies, such as endowment and money-back policies,
which have a maturity value can be used to avail loans.

Thus, you can’t avail a loan against a term insurance plan as it doesn’t have any maturity
benefits. Also, loans can’t be availed against unit-linked plans as the returns aren’t fixed and
depends on the performance of the market. It’s essential to note that you can opt for a loan
against endowment and money back policies only after they’ve acquired a surrender value. These
policies acquire a surrender value only after paying regular premiums continuously for 3 years.

4. Gold loans

For the longest time, gold has been one of the most favoured asset classes. The organized Indian
gold loan industry is expected to touch Rs.3,101 billion by 2019-20, according to a KPMG
report, thanks to flexible interest rates offered by financial institutions.

A gold loan requires you to pledge gold jewellery or coins as collateral. The loan amount
sanctioned is a certain percentage of the gold’s value pledged. Gold loans are generally used for
short-term needs and have a short repayment tenor compared to home loans and loan against
property.

5. Loans against mutual funds and shares

An ideal vehicle for long-term wealth creation, mutual funds can also be pledged as collateral for
a loan. You can pledge equity or hybrid funds to the financial institution for availing a loan. For
doing so, you need to write to your financier and execute a loan agreement.

Your financier then will write to the mutual fund registrar and a lien on the certain number of
units to be pledged is marked. Typically, you can get 60-70% of the value of units pledged as a
loan.

Similarly, with shares, financial institutions create a lien against shares against which the loan is
taken and the loan value is equivalent to a percentage of the value of the shares.

6. Loans against fixed deposits

The humble fixed deposit not only offers assured returns but can also come handy when you
need a loan. The amount of loan can vary between 70-90% of the FD’s value and varies across
lenders. However, it’s essential to note that the loan tenor can’t be more than the FD’s tenor.

II. Unsecured loans

These are loans that do not require collateral. The lender lends you the money based on past
associations, and your credit score and history. Thus, you have to have a good credit history to
avail these loans. Unsecured loans usually come at a higher rate of interest due to the lack of
collateral.

Types of unsecured loan

1. Personal loan

Offering an instant flush of liquidity, a personal loan is one of the most popular types of
unsecured loans. However, since a personal loan is an unsecured mode of finance, the interest
rates are higher compared to secured loans. A good credit score along with high and stable
income ensures you can avail this loan at a competitive rate of interest. Personal loans can be
used for the following purposes-
- Manage all expenses of a family wedding
- Pay for a vacation or an international trip
- Finance your home renovation project
- Fund the cost of your child’s higher education
- Consolidate all your debts into a single loan
- Meet unexpected/ unplanned/ urgent expenses

2. Short-term business loans

Another type of unsecured loans, a short-term business loan can be used to meet their expansion
and daily expenses by various entities and organizations.
- Working capital loans
- Machinery loans and equipment finance
- Small business loans for MSMEs
- Loans for women entrepreneurs
- Loans for traders
- Loans for manufacturers
- Loans for service enterprises

Flexi Loans

A facility whereby you can avail funds from your approved limit and as when required and pay
interest only on the amount used. You can withdraw on your loan limit, any number of times and
prepay when you have extra cash, at no extra cost. Such a unique facility gives you the freedom
to be in full control of your finances unlike rigid term loans and offers you savings on your EMIs
by up to 45%. Here, you also have the option to pay only interest as EMIs, with the principal
payable at the end of the tenor.

Based on what they are used for, loans are classified mainly into:

1. Education loans
Aspiration for higher education from reputed institutions have bolstered the demand for
education loans in the country. This loan covers the basic fees of the course along with allied
expenses such as the accommodation, exam fee, etc. In this loan, the student is the main
borrower while parents, siblings and spouse are co-applicants.

An education loan can be taken for a full-time, part-time or vocational course along with
graduation and post-graduation course in the fields of management, engineering and medicine,
among others. The loan must repaid by the student once the course is complete.

A unique feature of an education loan is the moratorium period, wherein the student has the
option of not paying the EMIs until after 12 months of completing the course or 6 months after
he/she starts working, whichever is earlier.

2. Vehicle loans

A vehicle loan is extended in the form of a two or four-wheeler loan which helps you to buy your
dream vehicle. Vehicle loans are offered either on purchase of a new vehicle or a used one. Your
credit score, ratio of debt to income, loan tenor, etc., play a crucial role in determining the loan
amount.

With Bajaj Finserv you can get pre-approved offers on all the above-mentioned loans and there
are no queues, forms or details needed. Here, your loan offer is already approved, so you can
avail instant financing. All you need to do is simply provide some basic details and get your pre-
approved offer.
 Loan in simplest terms can be explained as a thing that is borrowed, especially a sum of
money that is expected to be paid back with Interest. • The act of giving money, property or
other material goods to a another party in exchange for future repayment of the principal amount
along with interest or other finance charges is called loan. • A loan may be for a specific, one-
time amount or can be available as open-ended credit up to a specified ceiling amount. 2
 3. 3
 4. • A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral. • Secured loans are loans that rely on an asset as collateral for the loan. • In the
event of loan default, the lender can take possession of the asset and use it to cover the loan. •
Interests rates for secured loans may be lower than those for unsecured loans. • The asset may
need to be appraised before you can borrow a secured loan. 4
 5. • Unsecured loans don’t have asset for collateral. These loans may be more difficult to get
and have higher interest rates. • Unsecured loans rely solely on your credit history and your
income to qualify you for the loan. • In case of default, the lender has to exhaust collection
options including debt collectors and lawsuit to recover the loan. • For example- credit card
debt personal loans bank overdrafts credit facilities or lines of credit 5
 6. • Open-ended loans are loans that you can borrow over and over. • Credit cards and lines of
credit are the most common types of open-ended loans. • With both of these loans, you have a
credit limit that you can purchase against. • Each time you make a purchase, your available credit
decreases. • As you make payments, your available increases allowing you to use the same credit
over and over. 6
 7. • Closed-ended loans cannot be borrowed once they’ve been repaid. • As you make
payments on closed-ended loans, the balance of the loan goes down. • However, you don’t have
any available credit you can use on closed-ended loans. • Instead, if you need to borrow more
money, you’d have to apply for another loan. • Common types of closed-ended loans include
mortgage loans, auto loans, and student loans. 7
 8. Term Loan Personal Loan Home Loan Property Loan Education Loan Vehicle Loan Gold
Loan Business Loan Consolidated Loan Pay Day Loan Policy Loan Construction Equipment
Loan 8
 9. TERM LOANS • A term loan is simply a loan provided for business purposes that needs to
be paid back within a specified time frame. • It typically carries a fixed interest rate, monthly or
quarterly repayment schedule - and includes a set maturity date. It is secure type of loan. • A
secured term loan will usually have a lower interest rate than an unsecured one. 9
 10. Term Classification Long Term (<3years) Medium Term (1-3 years) Short Term (1 year)
10
 11. PERSONAL LOAN • A personal loan is typically issued for a specific amount and can be
used for various purposes at the discretion of the borrower. • A personal loan can be a secured
loan or an unsecured loan. A secured loan uses an asset — such as a house or car — as collateral
(or support). • If the borrower defaults on the loan, the creditor can take the asset. • An unsecured
loan does not require collateral and is considered high risk. As such, it has a higher interest rate.
11
 12. CONSOLIDATED LOANS • Debt consolidation is a widely used term that can imply the
use of a number of different debt assistance plans that combine multiple debts, loans or
payments. • There are three main types of debt relief options available: Debt Consolidation
Loans, Student Loan Consolidation, Debt Management Plans and Debt Settlement. 12
 13. • Things debt consolidation can do: 13 Lower your interest rates Lower your monthly
payments Protect your credit rating Help you get out of debt faster
 14. EDUCATION/STUDENT LOAN • A loan offered to students which is used to pay off
education-related expenses, such as college tuition, room and board at the university, or
textbooks. • Many of these loans are offered to students at a lower interest rate, such as the
Perkins loan or Stafford loan. • In general, students are not required to pay back these loans until
the end of a grace period, which usually begins after they have completed their education. • One
of the major benefits of these types of loans is that they come with low interest rates and do not
require collateral or a credit check. 14
 15. VEHICLE LOAN • Most people today need a loan when they buy a new or used car. And
the high cost of many cars means that consumers spend years paying for their vehicles. • Because
a car loan is such a huge debt for most people, it pays to understand it before entering into an
agreement. • A car loan is a secured loan, which means the vehicle serves as collateral on the
debt. • If you fail to make your payments, the lender can seize it as payment. • This is much safer
for the lender than unsecured debt, such as a credit card account, where the lender has only the
card-holder’s promise to pay 15
 16. GOLD LOAN • It is a form of debt financing whereby a potential gold producer borrows
gold from a lending institution, sells the gold on the open market, uses the cash for mine
development, then pays back the gold from actual mine production. • Gold loans had less appeal
in the 1990s as mining companies were offered other increasingly sophisticated financial
instruments, such as forwards and options, by the bullion banks. 16
 17. POLICY LOAN • A loan issued by an insurance company that uses the cash value of a
person's life insurance policy as collateral. • Traditionally, these were loans issued at a very low
interest rate, but that is no longer universally true. • If the borrower fails to repay the loan, the
money is withdrawn from the insurance death benefit. • Sometimes referred to as a "life
insurance loan." 17
 18. LOAN AGAINST PROPERTY (LAP) • The individual takes the loan by mortgaging the
house property. It is a Secured loan • One of the cheapest retail loans after home loans; usually
about 12%-16%. • Since the rate of interest is lower, frequently LAP Equated Monthly
Installments (EMI) turn out cheaper. • Maximum loan eligibility is determined primarily by the
value of the property and income. • The Maximum loan tenure for LAP is up to 15 years (180
months). 18
 19. HOME LOAN • The home loan is a loan advanced to a person to assist in buying a house
or condominium. • Purchasing a house can be a valuable form of investment. • However, it
requires considerable thought and careful financial planning before taking on such a big step. • If
owning a house is part of your financial goal, then you’ll need to know whether you can afford
from your income and savings. 19
 20. PAY DAY LOAN • Payday loans are short-term, high-interest loans designed to bridge
the gap from one paycheck to the next. • They are predominantly used by repeat borrowers living
paycheck to paycheck. • Because of the loans’ high costs, the government strongly discourages
their use. 20
 21. CONSTRUCTION EQUIPMENT LOAN • Construction Equipment loans are provided
for purchase of both new and used equipment like excavators, backhoe loaders, cranes, higher
end construction equipment etc. • The tenure of such loans vary from 12 to 60 months depending
upon the deal and nature of repayment capacity. • This is usually a secured loan where the
machine itself is hypothecated until the loan is repaid. 21
 22. BUSINESS LOAN • Businesses require an adequate amount of capital to fund startup
expenses or pay for expansions. • As such, companies take out business loans to gain the
financial assistance they need. • A business loan is debt, that the company is obligated to repay
according to the loan’s terms and conditions. • According to the U.S. Small Business
Administration, before approaching a lender for a loan, it is imperative for the business owners
to understand how loans work and what the lender will want to see from the owner. 22
 23. 23
 24. The 4 C's of Credit for Loans Character Capital Collateral Capacity To Repay 4 C
Concept 24
 25. • Character refers to the financial history of the borrower; that is, whet kind of "financial
citizen" is this person or business? • Character is most often determined by looking at the credit
history, particularly as it is stated in the credit score (FICO score). • Factors that will affect the
credit score include: Late payments Delinquent accounts Available credit Total debt •
The fewer the problems, the higher the credit score. • A high personal credit score (over 700)
may be the most important factor in getting a business loan. 25
 26. • Capacity refers to the ability of the business to generate revenues in order to pay back
the loan. • In other words capacity measures a borrower's ability to repay a loan by comparing
income against recurring debts. • Since a new business has no "track record" of profits, it is
riskiest for a bank to consider. 26
 27. • Capital refers to the capital assets of the business. • Capital assets might include
machinery and equipment for a manufacturing company, as well as product inventory, or store or
restaurant fixtures. • Banks consider capital, but with some hesitation, because if your business
folds, they are left with assets that have depreciated and they must find someplace to sell these
assets, at liquidation value. • You can see why, to a bank, cash is the best asset. 27
 28. • Collateral is the cash and assets a business owner pledges to secure a loan. • In addition
to having good credit, a proven ability to make money, and business assets, banks will often
require an owner to pledge his or her own personal assets as security for the loan. • Banks require
collateral because they want the business owner to suffer if the business fails. • If an owner didn't
have to put up any personal assets, he or she might just walk away from the business failure and
let the bank take what it can from the assets. • Having collateral at risk makes the business owner
more likely to work to keep the business going, as banks reason it. 28