Overview
A loan is when a specified amount of money is provided to another party in exchange for repayment of the principal amount along with an interest rate in installments as per the terms of the agreement. Loans can be beneficial to achieve and manage the financial plans of an individual. According to a report in Trading Economics, the value of loans in India increased 5.50 percent year-on-year in the two weeks to August 14th, 2020.
SOURCE:TradingEconomics
There are various types of loans that can be useful when we fall short of funds. In India, there are majorly two classifications of loans on a collateral basis:
● Secured Loans
This is a type of loan which is backed up by collateral to lower the risk associated with it. In this case, the bank or financial institution can seize the collateral and receive the debt-money if the borrower fails to repay the loan. The interest rate on a secured loan is generally lower than on an unsecured loan.
● Unsecured Loans
An unsecured loan is supported only by the borrower’s creditworthiness. These types of loans are riskier for lenders than secured loans and come with higher interest rates and require higher credit scores. The lender can take the borrower to the court if the borrower defaults on an unsecured loan.
The terms of the loan are accepted by both the parties before the money is provided and both of them can decide on what type of loan do they want to determine i.e., a secured loan such as a mortgage or an unsecured loan such as credit cards. There are various types of loans available in India that you can opt for. This report deals with some of the common loan options that one may require at any point of time in their lives.
a) Personal loans
● Personal loans are required when an individual needs money for personal use like buying an expensive accessory or paying off debts, etc. You can utilize the money in any which way it is needed for your financial livelihood.
● The interest rates are higher for this type of loan.
● The borrower can raise funds from one's friends or relatives for a personal loan, lending institutions such as SBI and HDFC banks, and non-banking financial companies (NBFCs) like Tata Capital and Bajaj Finserv which offer personal loans in a more structured format. However, a borrower must consider lending from financial institutions rather than another individual because they have a more reliable and structured format of providing loans.
SOURCE: Paisabazaar.com
● The minimum and maximum amounts vary from one lending institution to another. As per the SBI and HDFC website, they offer a maximum personal loan of Rs 20 lakh to employed individuals and HDFC Bank offers personal loans up to Rs 12 lakh.
● The borrowers must have a minimum of Rs 15,000 of monthly income irrespective of their account holder, to be eligible for a personal loan from SBI. On the other hand, the borrower should be aged between 21 years and 60 years and should have a job for at least two years, with a minimum of one year with the current employer.
● If the account is maintained with HDFC Bank, then the borrower should have a minimum Rs 25,000 net income per month, and if they do not hold an account with HDFC then not the borrower must have a minimum Rs 50,000 net income per month.
● Generally, a personal loan is offered for a maximum of five years by financial and non-financial institutions.
b) Home Loan
Buying a house requires quite a lot of money and it may not be possible for an individual to have that amount of money at once but he/she can have access to such amount by applying for a home loan offered by banks. There are various types of home loans available in India:
Construction of a property.
Remodeling of an existing property.
Buying a property.
SOURCE: EconomicTimes
● In terms of tenure, home loans can be 20 years or more and can take up twice the
amount of what was borrowed.
● As the amount of property appreciates over time this type of loan may be fruitful in the future. However, at present home loans are one of the cheapest loans available in the market and are a great way to consider purchasing a property. For loans like home, auto, and personal loans, the borrower is usually required to pay processing charges to avail of the loan.
These are a few cheapest loan options one can opt for while applying for a home loan:
SOURCE: MyMoneyMantra.com
c) Education Loan
● An educational loan is a suitable option for financially underprivileged students looking to pursue higher education from a reputed university. As soon as the student gets placement from the university, he/she can repay the educational loan from their salary. Until then the student and their family have no burden of providing the money back to the bank.
● At present, educational loans are offered by all reputed banks and NBFCs in India. Reputed banks such as SBI and HDFC Credila are even willing to provide educational loans up to Rs 30 lakh without any collateral for admissions to reputed institutions such as IITs/IIMs etc.
SOURCE: TheEconomicTimes
● Under Section 80E of the Income Tax Act, the entire interest paid (without any limit) on the education loan is tax-deductible. This reduces the interest rate. For making educational loans affordable for every student, multiple tax benefits and government interest subsidy schemes are available in India.
● The Central Government of India has launched an Interest Rate Subsidy scheme for Education Loan for students where the Government of India provides full interest subsidy during the entire educational period along with one year or six months after securing a job.
d) Gold Loan
● Gold loan is the fastest and easiest loan available in India. This is a secured and collateral loan against gold where the borrower takes a loan from a lending bank in exchange for gold articles.
● Non-financial institutions like NBFCs offer gold loans to individuals as well. In this case, the amount of loan varies like ICICI Bank provides gold loans between Rs 10,000 and Rs 1 crore, and the State Bank of India (SBI) provides gold loans between Rs 20,000 and Rs 20 lakh.
● The maximum period of repayment of an SBI gold loan is 36 months as per their website.
● Apart from processing charges, the borrower might have to pay for the valuation of the particular gold article used as collateral.
Source: MyLoanCare
e) Car Loan
● An auto loan is a secured type of loan against the vehicle itself and is almost offered by every bank in India that helps you to purchase a single-vehicle. The borrower has to repay the loan in installments and if fails to do so, the bank has the right to take back the vehicle.
● The borrower must be aged between 18 years to 65 years. However few banks require a minimum age of 23 years.
● Banks offer loans up to Rs 50 lakhs or even Rs 1 crore to the borrower who is required to have a minimum of Rs 18,000 monthly income.
● Most banks decline the loan if the borrower does not have a CIBIL score of 700 or more. Interest rates vary from lender to lender. Generally, they are between 9.25% to 20.00%. SBI charges a 9.65% interest rate with no processing fees along with a tenure of 7 years. On the other hand, HDFC bank offers up to 100% of ex-showroom prices and charges between 11.50% to 13.75% interest.
SOURCE:MyMoneyMantra.com
f) Overdraft
● Overdraft means an individual can withdraw more money than they have deposited in their bank accounts. This is a facility available for those who have a good customer and bank relationship.
● There are two types of overdraft: secured overdrafts and unsecured overdrafts. This type of loan can be taken against salary accounts, savings account, or term deposits. It is suitable to achieve short-term fund requirements and have a flexible repayment option.
● The rate of interest of an overdraft loan is calculated on the amount of overdraft used and is billed at the end of each month. In the failure of repayment of the loan, a penalty amount is added to the principal amount. SBI offers an overdraft limit of Rs 25,000 to Rs 5 crores along with a 1% interest rate above the relative time deposit rate.
SOURCE: Desidime
g) Loan Against Insurance Policies
● The borrower is eligible to apply for a loan against insurance policy only when the insurance policy is aged over 3 years. In this case, the insurer can offer a loan to the insured i.e., the borrower. However, the borrower has the option of applying for the loan to a bank where they need to be provided with all the documents related to the insurance policy.
h) Cash Credit
● A cash credit loan permits the borrower to lend a specified amount of money from the bank. The borrower provides a few securities to the bank in exchange for the borrowed amount.
● Sometimes companies opt for cash credit loans to finance their working capital requirements where the company can borrow as much as they want but to a certain credit limit. The limit is based on the borrower’s or a company’s creditworthiness.
SOURCE: SlideShare
● This is a short-term source of finance with a tenure of up to 12 months. The interest rate is only charged on the amount borrowed irrespective of the credit limit.
● Punjab National Bank (PNB) has recently launched a scheme to facilitate cash credit or loans to weavers against their credit requirements. Under the PNB Weaver Mudra Scheme (PNBWMS), the bank offers loans up to Rs 2 lakh to weavers which will be granted as per the scheme of the Ministry of Textiles.
Summary
To apply for such loans in India, you will have to fill up the application form for the type of loan you require making sure that you provide the correct information necessary to the lender.
Maintain a good CIBIL score, between 700-750, in which case banks may approve your application easily.
Then the bank will ask you to produce a series of documents to supplement their loan application form, such as proof of identity, income proof, and other certificates that need to be submitted along with the application form.
After submission of the documents the bank verifies and once they complete scrutinizing your application you will receive the result.
Disclaimer: The data provided above are relevant for August 2020.