What is loan and what are the different types of loans?

Loan is an amount of money lent by one or more individuals to other individual or organization. The party borrowing the money incurs a debt and is usually bound to pay an interest on the sum borrowed till the time the principal amount is repaid.

Types of Loans:

The various types of loans can be broadly classified into two main categories

1. Secured Loans
2. Unsecured Loans

1. Secured Loans:

Secured loans are the ones that require a collateral. This means that the borrower has to provide some or the other asset to the lender as a security for the money being borrowed. This ensures that if the borrower is unable to repay the amount of money borrowed by him the money can be returned from the collateral asset. There are various types of secured loans. Let’s discuss them one by one:

1. Home Loan:

Home loans are the loans that are taken for building or buying a home. While buying a home/land you are required to make a down payment of 10 to 20% of the total value of the property. The home loans can be of different types depending on their purpose like land purchase loan, home construction loan, top up loan etc.

• Loan against Property (LAP):

LAP is one of the most common form of secured loans where you can pledge your residential, commercial or industrial property in order to avail funds. The amount of loan given in such cases is equal to a certain percentage of the value of the property against which the loan is being taken.

• Loan against Insurance policies:

You can apply for a loan against your insurance policies but always keep in mind that not all insurance policies provide this benefit. Only policies which have a maturity value like money-back plan and endowment policies can be used to raise a loan against them.

• Gold Loans:

For availing a gold loan you need to pledge your gold jewelry or gold coins as a collateral. The amount of loan granted in such case is a certain percentage of the total value of the gold that is pledged as a security. They are generally opted when you need funds for short-term purpose.

• Unsecured Loans: As the name suggests, unsecured loans are the ones that do not require a collateral. The lender grants you the money on the basis of past relations, goodwill or credit score. They however have a higher rate of interest associated with them.

The various types of unsecured loans are as follows:

1. Personal Loan:

A personal loan is one of the most popular type of unsecured loan which is availed for various personal requirements like managing a family wedding, higher education of children, international trip, meeting urgent expenses etc. Since they are unsecured loans they have a higher rate of interest to be paid.

• Short-term business Loan:

These loans are generally taken by businesses to meet their daily expenses and expansion requirements and can be of different types like working capital loan, MSME loans, manufacturing loan, loans for purchasing machinery etc.

• Education Loan:

Education loans are popular among students who which to get higher education from a reputed university. They cover expenses like college or university fees, travel costs, and other course related expenditures.

• Vehicle Loans:

Vehicle loans are for two-wheelers or four-wheelers and are availed to buy ones dream vehicle. The borrower’s credit score, debt to income ratio, tenure of the loan play an important role in determining the amount to be granted as loan to the borrower.

Advantages of Loans:

• The amount of loan is not repaid on demand and hence is available for a fixed period of time.
• They can be tied to the life of the asset or the collateral used for borrowing them.
• The repayment of the capital can be frozen in certain cases at the time of availing the loan.
• You only need to pay the amount of interest to the lender and not a part of your profits in case of a business loan.
• The rate of interest remains fixed during the tenure of the loan.

Disadvantages of Loans

• Loans of large amounts can have strict terms and conditions to be met by the borrower.
• Loans are not flexible in nature.
• Regular payment of interest can lead to cashflow problems at times.
• At times you need to keep a collateral for availing a loan which can be at risk in case you fail to pay the amount of loan taken.
• If you are willing to pay the amount of loan borrowed before the end of the loan term you might need to pay an additional charge for it.

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