Different types of Loans in India-When to use them?

Motivation for this post is one of my client’s profile. Currently in India we have different types of loans available ranging from personal loans to marriage loans. But when to use which loan is a smart way of managing your money. Hence first let us look at different type of loans available.

1) Home Loan-Home loan as name suggest is the loan against buying property. Every individual currently have dreams to have their own home. To make affordable best option is home loan. Again their are sub-categories of home loans which are as below.

• Home loan for residents
• Loans for repairs and extension
• Land purchase loan
• Top-up loans
• Loan for Earnest Money Deposits (EMD)
• Reverse Mortgage Loans
• Loan against property

You may also find different variant of home loans other than above. But I listed basic type of home loans.

2) Personal Loan-It is the loan granted to fulfill your expenses which ranges from buying some expensive electronic gadgets to booking your air tickets 🙂 Yes people used to use this facility for anything they can. They forget that usually rate of interest on such loans will be higher than other types of loans. But still to have something in advance end up them to borrower of such type of loans. Here we may find two types of loans

• Secured Loans-Where you provide some collateral as a safety against loans.
• Unsecured Loans-In such type of loans borrower collateral not required.

3) Car Loan or Vehicle Loan-This is usually used to meet your financial requirement when one is planning to have his dream car or bike. It is usually a secured loan where collateral is your vehicle and in case of default lender may recover it by taking back your vehicle.  But some lenders offer unsecured loans where your credit score matters more.

4) Education Loan-This is actually a handy tool for parents who not planned well for their kid’s higher education. For a detailed view on this visit my earlier post “Know all about Education Loan features“.

5) Gold Loan-This was one of the easiest and fastest way of loan when gold rate was at it’s peak. But currently lot of lenders may not feel it better collateral due to falling in gold price, especially gold loan companies. Recently RBI banned any gold loans against gold ETFs and gold mutual funds. Eventhough it forms easiest and fastest way of getting loan but better to look for risks involved in it, especially when you are dealing with NBFCs.

6) Loan against Insurance Policies-You can use your insurance investment as either collateral or take loan from insurer itself if that policy is eligible for loan. Usually loans will be available after 3 years of policy period. You will get loan easily on your policy from insurer. But other method to take loan is to pledge your policy document with banks and take loan on that. LIC will offer you loan on your policy with the interest rate of 10%, which I think competitive pricing compare to other type of loans.

7) Loan against Bank FDs-This is one form of loan where your collateral is your bank FD itself. Suppose you have bank FD of around Rs.10,00,000 then you are usually eligible to get loan upto Rs.8,00,000. But interest rate will 1-2% higher than your FD rate. But still this form of loan is also fastest and best way.

8) Loan from PPF or EPF-You can avail loan from PPF when one satisfies certain conditions. For detailed view on the same visit my old post “PPF-Loan and Withdrawal“. You can avail loan from EPF too. But you can avail loan from EPF only for special purposes like purchase of plot, medical treatment, education or marriage of children, construction or purchase of house, re-payment of home loan, renovation of home or pre-retirement. But all are not eligible to take loans. Their are certain conditions like minimum years of completion, age or proof you need to produce. So it seems bit lengthy procedure.

9) Loan against Shares or Mutual Funds-Few lenders offer loan against your investment value of shares or mutual funds. But you will not get more value from this. Reason is, both the investments (if mutual fund is of equity oriented) then fluctuation in values will be high. Hence to protect their loan amount usually lenders offer less loan.

10) Loan from unrecognized sector-This is one of the easiest but costliest way of fulfilling your financial dream. Usually interest rate will be in the range of 20%-30% but you can get it immediately. Such type of loans are useful who are running out of time and not have any source also to fund their financial requirements. But looking at this option is costly affair. Hence it is highly advisable to avoid such funding.

Is their any thumb rule like how much percentage of income one should have loans? Yes to have control over your financial life, it is always advisable to have EMI outgo not more than 60%, this includes all loans one have taken. Otherwise you may be in financial mess. But taking all types of loans for which you are eligible is also a not wise decision especially in case of personal loans. People tend to attractive for easy offers and low EMIs but forget about the interest and processing fee costs involved on loan. Hence understand your priorities before going for loan.