To put it simply, a loan is basically an amount of money that’s borrowed from either an individual or an entity. The loan is taken with the promise of repayment within a predetermined time period. In return, the individual or the entity lending the money charges a percentage on the borrowed amount as interest. This interest has to be repaid along with the principal amount that was borrowed, before the expiry of the predetermined time period.   

 

What are the different types of loans in India? 

Okay so, now that you know what a loan is, let’s get into the details of the types of loans in India. When it comes to loans, there are different kinds you can avail, with each one serving a distinct purpose. That’s precisely why financial experts recommend that you identify the kind of loan that fits your current situational needs and requirements before you go ahead and apply for a loan. 

 

Here’s a closer look at 5 of the most common types of loans in India that you need to be aware of. 

 

 

• Home Loans

 

One of the most popular kinds of loans in the country, a home loan is essentially a kind of loan that you avail to fund the construction or purchase of a house. These loans are known as secured loans, where your borrowing is secured by an asset. In this case, the asset is the house that you plan to purchase or construct. 

 

And in the event of non-repayment of the loan, the lender can choose to take over the house and sell it to recover their dues. That said, to avail a home loan, you would have to pay a percentage of the total value of the house upfront as down payment. This is usually around 10% to 20% of the value.

 

 

• Personal Loans

 

A personal loan is a kind of a loan that you can avail when you’re in need of funds to meet your personal needs. Unlike other types of loans in India, personal loans can be used for almost anything. There are generally no restrictions with respect to the usage of the borrowed money. So, for instance, you can use a personal loan to fund your vacation, purchase a new phone that you’ve been eyeing, or even pay for your wedding expenses. 

 

Of late, personal loans have been rapidly gaining popularity in India. This is due in part to the easy availability of these types of loans, minimal documentation, and hassle-free online application process. 

 

 

• Education Loans 

 

Similar to a home loan, an education loan is again a type of loan that’s used for a specific purpose, which in this case would be to fund your education or your child’s studies. An education loan is quite unique since it is one of the few types of loans in India that come with a built-in moratorium period. 

 

This essentially means that the student availing the said loan can choose to not pay the EMIs for up to 12 months from the date of completion of the course. Alternatively, if the student starts working right after the completion of the course, they can choose to not pay the EMIs for up to 6 months. This makes it easy for the borrower to earn some money first, and then use it to repay the debt.

 

 

• Business Loans

 

A business loan is another kind of unsecured loan that’s generally availed to manage the day to day expenses of a business. That said, a business loan can also be used to meet the capital requirements of the entity, like purchasing new equipment or buying land to open up a new branch. 

 

As with a personal loan, these types of loans also come with zero restrictions with respect to the usage of the loan amount. This effectively means that you can use a business loan for almost any purpose you see fit, as long as it is connected to your business. 

 

 

• Vehicle Loans 

 

And lastly, vehicle loans are the kind of loans that you avail to fund the purchase of a vehicle. The vehicle can be anything from a two-wheeler or a car to a truck or even a construction vehicle. One of the main highlights of this kind of a loan is that it can be availed to purchase both new and used vehicles. 

 

That’s not all. Vehicle loans are also secured loans, where the vehicle that you purchase is the asset used for collateral. And in the case of non-repayment, the lender can simply choose to take possession of the vehicle, sell it, and use the proceeds from the sale to recover the unpaid loan amount.

 

Wrapping up

With this, we’ve come to the end of this chapter. With this, you may now be well aware of 5 of the most common types of loans in India. In the next chapter, we’ll decode home loans and learn more about them. 

 

A quick recap

• A home loan is a kind of loan that you avail to fund the construction or purchase of a house. 
• A personal loan is a kind of a loan that you can avail when you’re in need of funds. It can be used to fund almost any expenses.
• An education loan is a type of loan that’s used to fund your or your child’s education.
• A business loan is another kind of unsecured loan that’s generally availed to manage the day to day expenses of a business.
• Vehicle loans are the kind of loans that you avail to fund the purchase of a vehicle.