Loans are a sum of money borrowed either from a financial institution, bank or a friend in exchange for future repayment with interest. Loans are of various types such as secured and unsecured, and open-ended and close-ended.
Open-Ended and Closed-Ended Loans
These loans are ones that you can borrow over and over. Lines of credit and credit cards are a common example of open-ended loans. These kinds of loans have a credit limit on the amount you can borrow at a time. Depending on your need, you can either use a part or your entire credit limit. With every expenditure, the credit limit too decreases. It goes up again as and when payments are made, restoring the credit level to the original and allowing you to use the same credit repeatedly.
Close-ended loans cannot be borrowed again once the repayment is done and are one-time loans. As the payments are made, the loan balance goes on decreasing. However, available credit cannot be used on close-ended loans. If additional money is required, one has to go through the entire process of getting the loan approved again. Common close-ended loans are student loans and auto loans.
Secured and Unsecured Loans
To get a secured loan, collateral must be provided to the bank. This is done so that if the loan is defaulted by the borrower, then the bank can take possession of the collateral to recover the loan amount. A house or land is generally kept as collateral. Interest rates for such loans are much lower than those of unsecured loans.
Before submitting it, the provided collateral asset is first appraised by the bank to confirm its stated value. The lender then will approve you to borrow an amount equivalent to the asset. An example of a secured loan is a title loan.
Unsecured loans don’t need a collateral while issuing a loan. Thus these loans are more difficult to get approved and generally have higher interest rates as opposed to secured loans. These loans only take into consideration your income and credit history to qualify you for the loan. Some examples of unsecured loans are business loans, personal loans, etc.
A home loan is applied for when someone wants to purchase a house or carry out renovations. A bank generally considers 40% of a person’s income as his living expenses. Thus the EMI is considered on the amount after the money deducted for daily expenses.
This is the most lucrative kind of loan offered by banks. They generally have interest rates on the higher side and it usually depends on the individual’s creditworthiness. The sum borrowed can be used for any purpose by the borrower.
The interest rates on gold loans are lower than those levied on personal loans, giving it an edge. Gold loans also do not charge processing fees. However, a sum is charged for valuation of the gold. It’s a very commonly opted for loan in India.
These are loans taken against fixed deposits and levy an interest rate of 11-12%. When in need of short term credit, it is better to opt for an overdraft loan rather than a personal loan due to its more attractive interest rates.
Another kind of loan that is available is loans obtained against insurance policies such as LIC. However, there are certain criteria that must be met before one is eligible to apply for the loan. The individual should have a surrender value which happens after the payment of 3 yearly premiums. After which you can avail a loan which will match up to 90% of the surrender value.
This kind of loan is very similar to a personal loan except that your owned property is given as collateral against the loan. If you default the loan, the property is confiscated.
An education loan is the most commonly availed loan in India today for students pursuing studies in India as well as abroad. The unique feature of an education loan is that the repayment of the loan begins only once the student completes his/her course. Some bank even allow a 6-month period after graduation as a relaxation period before starting repayment of the loan.