Different Types of Loans provide various options for consumers to better manage their financial situations. Loans have become an integral part of our lives. Most people either service a home loan, a car loan, a personal loan or a combination of these. These loans include those taken for consumer durables, housing, auto, education, credit card outstanding, advance against fixed deposits, shares and bonds.
Secured loans care usually the best way to obtain large amounts of money. 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 recover the loan amount. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest. Secured loans usually offer lower rates of interest, higher borrowing limits and longer repayment tenors than unsecured loans. The asset may need to be appraised or valued before you can borrow a secured loan.
This is the oldest form of a loan. Under this, the lenders take any asset as security in their custody or possession when giving the loan to the borrower. In case of default by the borrower, lenders have the right to sell the asset under their possession to recover the outstanding dues (principal along with interest). Common examples of loans by pledging assets in current times are gold loans and loans against securities such as shares, mutual funds or bonds. Typically, banks provide loans up to 50% of the value of approved securities.
Under this method, the lender provides a loan against movable assets. For instance, a vehicle loan (for a car, two-wheeler or any other vehicle). When you borrow from a bank to buy a car, the car gets hypothecated to the bank. The vehicle that is being hypothecated to the bank will remain in the possession and use of the borrower, but in case of default, the lender has the right to seize the vehicle and sell it to recover the unpaid loan amount.
This is an agreement in which the lender provides a loan against immovable assets. A common example is a home loan. Of the total loan to individuals by banks, about 55% is home loans. Just like hypothecation loan, here too, the asset that is mortgaged to the lender remains in the possession and use of the borrower. But in case of a default or non-payment of estimated monthly installment, the lender, say a bank can seize the property. If a borrower fails to repay her home loan, the bank can auction the property to recover the outstanding amount.
A loan disbursed against the mortgage of property. The loan is given as a certain percentage of the property's market value, usually around 40 per cent to 60 per cent. You can normally take a loan against your self-occupied residential or commercial property. LAP is usually taken for meeting business expansion goals, financial goals, high cost medical expenses or any other emergency.
Unsecured loans don’t have asset for collateral and include loans like credit card, personal loans, small ticket business loan and education loans. These loans may be more difficult to get and have higher interest rates. Lenders take more risk with no property or assets to recover in case of default, which is why the interest rates are considerably higher. Unsecured loans rely solely on your credit history and eligibility- basis your income and current exposure to credit.
When you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. You will be judged based on the 3 C's of credit -- character, capacity, collateral; these are all criteria used to assess a borrower's creditworthiness. .
Personal loans or instalment based unsecured loans are among the costliest credits available, but on the other hand most conveniently available loan, as they have no end-use attached to it. It can be taken for varied requirements such as a vacation, marriage, higher studies, home improvement, medical expenses and so on. Their interest rates range between 15% and 24% per annum. Prepayment charges are 2-5% of the principal outstanding. The maximum tenure offered is usually only 5 years, which means the equated monthly instalment (EMI) would be high as compared to loans with longer tenures. The processing fee is 2-2.5% of the loan amount. There are prepayment charges and a lock-in period to contend with. While expensive, personal loans are easy to get since no collateral is needed, paperwork is less and disbursement usually takes place in 2-3 days.
Credit cards are unsecured revolving based loans. You don’t get a lump-sum at the beginning as a loan; instead, you borrow whatever you need whenever you need it. Plastic money as it’s commonly known, as is a card issued by a bank which has a pre-set credit limit available on it. As long as you pay back the money you borrowed within the “grace period” of 25-30 days, you don’t have to pay extra. If you don’t pay it back in that time period, you’ll have to pay interest on the amount borrowed and fresh purchases until the outstanding is paid in full.