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Different Types of Bank loans in India

Different Types of Bank loans in India

posted on 2019-07-25 10:19:02 by Admin

Anybody can face financial issues while achieving his or her goals. It could be related to anything like education, business, buying a home or buying your dream car etc. In these conditions loan is the first thing which comes in our mind. There is wide variety of loans available in the Indian market. Let’s firstly understand what is loan, how it works and how to apply for it.

What is Loan

borrower’s account

In simple terms, a loan is money that you borrow from a bank or non-banking financial company (NBFC) on some terms & conditions as decided by your lender on a particular interest rate for a fixed interval of time. You have to re-pay that amount along with interest as decided by your bank. The loan includes two terms i.e. principal & interest where the principal is the amount you are taking and interest is the charge you are paying against that loan for that tenure.

Categories of Loan in India

There are two main categories of loan available in the market which is as follows:

Secured Loan:

As its name suggests, the secured loan gives security to lenders in case if the borrower failed to re-pay the loan amount. In a secured loan, the borrower pledges his assets as collateral to a bank or non-banking financial company. Secure loans help banks in the collection of the given loan by selling their property through a bidding process or by using the OTS method. There is no fix assets range for collateral as it could be anything like your land, house, car, insurance bond, equipment, etc. 

There are many kinds of secured loan, the bank can give you a secure loan in mainly two different forms that are:

  • Overdraft: The overdraft facility is given to only selected customers as per their records and credit score. The borrower must be having a current account in any bank and the bank gives him a loan as per his credit score & on the basis of his monthly salary. In an overdraft facility, the interest rate is also charged based on debited balance and the number of days the debited balance has prevailed in the borrower’s account. Check free credit score.
  • Cash Credit: Cash credit is slightly different from the overdraft facility, in cash credit, the borrower gets a certain amount sum for a certain period which can be utilized according to the borrower as per his or her need. It gives a wide variety of choices to the borrower to draw money as per his need.

Types of secured loan where a banker provide loan against borrower assets/property

  • Pledge: The pledge is applicable in the case of movable assets. In the pledge, the lender takes actual possession of the borrower’s property. For example, the bank gave you money against your gold where you can’t get it back until you fully paid your debt amount from the bank.
  • Mortgage: It is mostly applicable against the immovable (anything that is attached to the earth, like land, shop or house) assets of the borrower. Here the legal ownership of the defaulter property can be transferred to the lender. Although, the borrower continues to remain in the possession of his property. Example: Home loan.
  • Hypothecation: Hypothecation is also like pledge which applies to movable assets but in Hypothecation, possession of the security remains with the borrower. Example: Car loan.
  • Assignment: The assignment is also a kind of charge held by the lender on borrower’s current or fixed assets it includes insurance policies, the book of debts, etc.
  • Unsecured Loan: An unsecured loan is a form of loan where the lender gives the loan to the borrower on the basis of his creditworthiness rather than any type of collateral. An unsecured loan is also known as a signature loan or personal loan. A borrower can get this form of the loan without using his assets as collateral. A credit score of the borrower plays a major loan in approving the loan. Credit cards, Student loans & Personal loans are its main example.

10 most popular loans in India:

There is a variety of loan available in the market, you can choose them according to your need below are the few forms of loan which you can apply for.

Home Loan:

Most of the people in India apply for Home loan. If you are planning to buy a new home/flat or planning to construct a new home then you can apply for a home loan. You can apply it as per variant fixed interest and variable interest. Most of the people go for variable interest option. After getting the home loan, you solely also get the benefits in the tax too.

  • Interest Rate: 8.65% – 11 % varies bank to bank**
  • Collateral: Physical or unmovable property
  • Amount you can get: Around 85% of the property value

Advantages & disadvantages of home loan:

  • It gives benefit in Tax.
  • You can get higher loan amount based on your property or your salary.
  • Repayment flexibility
  • Can choose variant fixed interest and variable interest option
  • Can get about 85% amount of the property value.

Education Loan:

Education loan is available for students only who are seeking for funds to pay their higher education fee. You can avail of education loans for both Indian and foreign education. It also gives you tax benefits under section 80E.

  • Interest Rate: 10.45% – 16.50 % varies bank to bank**
  • Collateral: Depend on banks, some bank gives unsecure education loan
  • Amount you can get: Varies on collateral value

Advantages & disadvantages of education loan:

  • It gives benefit in Tax.
  • High interest Rates
  • Higher time period for repayment

Car or Vehicle Loan:

A car or vehicle loan is given against the purchase of a new vehicle. If you are planning to buy your dream car then you can apply for a car loan from your bank. By following the bank criteria and submitting all the necessary documents, you can get this loan easily.

  • Interest Rate: 9.35% – 17 % varies bank to bank**
  • Collateral: Your new vehicle
  • Amount you can get: Around 75% of your car value

Advantages & disadvantages of car or vehicle loan:

  • Vehicle is taken as collateral.
  • You can get the higher amount as per car re-sale value.
  • Hard to get loan against vehicles older than 5 years.
  • High interest rates.

Personal Loan:

A personal loan is the simplest form of the loan where the lender doesn’t ask for any kind of collateral. A personal loan is given on the basis of the borrower’s salary and credit score.

  • Interest Rate: 10.75% – 25% varies bank to bank**
  • Collateral: No need of collateral
  • Amount you can get: High credit score and salary helps in getting higher amount

Advantages & disadvantages of personal loan:

  • No need to put your property as collateral against the loan.
  • Instant and fast processing.
  • Need good credit score and high salary
  • High interest rates.

Loan against FD:

As its name suggests, you can apply for a loan against your fixed deposit. You must hold an FD account to avail loans against your FD.

  • Interest Rate: 1% – 2% varies bank to bank & your FD rate**
  • Collateral: Your fixed deposit
  • Amount you can get: Around 90% of your FD amount

Advantages & disadvantages of loan against FD:

  • Fast and instant approval of the loan.
  • In case of defaulter, bank can close your fixed deposit to recover the amount.
  • In case of Joint account, both holder need to sign the documents.
  • Low interest rates.

Gold Loan:

The gold name is also known as the loan against gold. It is a form of secured loan where the borrower pledges his/her gold or gold ornaments as collateral or we can say lender pay the loan amount against the borrower’s gold.

  • Interest Rate: 10.55% – 13% varies bank to bank**
  • Collateral: Your gold
  • Amount you can get: Around 75% of your gold’s value.

Advantages & disadvantages of gold loan:

  • Instant and fast processing.
  • The process do not includes long documentation process
  • High interest rates.
  • Lender can sold you gold asset if you get failed in re-payment of loan.

Business Loan:

The loan which is taken for business purpose or to start a new business loan. You can also apply for the business loan if you want to expand your business or want new machinery for it.

  • Interest Rate: 15.50% – 18.30% varies bank to bank**
  • Collateral: It depends on the amount you are borrowing.
  • Amount you can get: Varies on your business potential

Advantages & disadvantages of Business loan:

  • Can get it without any collateral.
  • Given time period for re-payment could be long.
  • High interest rates.

Over Draft Loan:

Banks provide an overdraft loan to its selected customers by keeping in mind the consumer’s salary and overall credit limit. Mostly it is given to the current account holder. However one can avail of this facility by using his assets as collateral.

  • Interest Rate: 15.50% – 18.30% varies bank to bank**
  • Collateral: It depends on the bank and your collateral assets.
  • Amount you can get: Varies on your credit score/salary & assets.

Advantages & disadvantages of Business loan:

  • You can use funds as per your requirement.
  • Consume very less time in processing.
  • Can draw the fund as per your need.

Mudra Loan:

Mudra loan is also known as Pradhan Mantri Mudra loan, it is a new endower by govt. of India where it provides funds to small enterprises and whose credit need is less than 10 lakh rupees.

  • Interest Rate: 10.99% – 20.70% varies bank to bank**
  • Collateral: Not required.
  • Amount you can get: Up to 10 lakh rupees only.

Advantages & disadvantages of Mudra loan:

  • No need of collateral.
  • Good for small entrepreneurs.
  • Interest rates are high.
  • Loan has 10 lakh rupees limit only.

Agriculture Loan:

The loan which is taken by the farmers for agriculture purpose which can include animal farming, seasonal crop, purchase of agriculture tool, etc. Bank provides agriculture loan for short term period only.

  • Interest Rate: 2% – 8.80% varies bank to bank**
  • Collateral: Not required till the limit of 1.6 lakh
  • Amount you can get: Varies on collateral assets

Advantages & disadvantages of agriculture loan:

  • No need of collateral till 1.6 lakh.
  • Quick processing by banks.
  • Low interest rates.
  • Need few documents only.

Other than these loans, many people also apply for loan against property.