Types of Loans People Obtain From Various Sources
A loan is a type of debt that an individual or other entity takes on. The borrower receives a sum of money from the lender, which is generally a business, financial organization, or government. In exchange, the borrower agrees to a set of terms, which may include financing charges, interest, a repayment schedule, and other obligations.
Individuals, company owners, and MSMEs in the trading, manufacturing, and service sectors were the primary beneficiaries of the loans. Various financing plans are available, depending on the type of the firm and its requirements. Let’s go through the many types, characteristics, and qualifying requirements for business/MSME loans offered by banks and NBFCs, as well as government-sponsored loan programs.
The two categories of loans accessible are secured and unsecured loans. Secured loans require you to put up anything of value as collateral in the event you are unable to repay your loan, whilst unsecured loans enable you to borrow the money without putting up any property (after the lender considers your financials).
Some examples of the secured loans:
1. Home-equity loans
Homeowners might borrow against the equity they have built up in their houses. That is, they can borrow up to the value of their property. They can borrow half of the house’s worth if half of the mortgage is paid off, or they can borrow 50% of the property’s value if the house has grown in value by 50%. In simple terms, the amount that can be borrowed is the difference between the home’s current fair market value and the amount still owing on the mortgage.
One of the benefits of a home equity loan is that the interest rate is much lower than that of a personal loan. The fact that the property is used as security for the loan is the largest disadvantage. If the borrower defaults on the loan, the borrower may lose their home. The money from a home equity loan can be used for anything, although it’s most commonly utilized to improve or expand the house.
2. Home-equity lines of credit (HELOCs)
The home equity line of credit (HELOC) functions similarly to a credit card, except the home serves as collateral. The borrower is given a maximum quantity of credit. For as long as the account is open, which is generally 10 to 20 years, a HELOC can be utilized, repaid, and reused.
The interest rate is not established at the time the loan is granted, unlike a traditional home equity loan. The interest rate is generally variable because the borrower can access the money at any moment over a period of years. It might be linked to a fundamental statistic like the prime rate. The interest costs on the outstanding debt will rise during a period of rising rates. Because the prime rate increased, a homeowner who borrows money to construct a new kitchen and pays it off over a period of years may end up paying considerably more in interest than planned.
There’s one more potential drawback. The offered credit lines might be quite considerable, and the introductory rates can be quite appealing. It’s all too simple for customers to get themselves in over their heads.
3. Mortgages Loan
Mortgages are loans that are given out by banks, credit unions, and internet lenders to enable people to purchase a property. A mortgage is secured by your home or land so if you miss a payment, you risk losing your home or land. Hence, mortgages are considered secured loans, they have some of the lowest interest rates of any type of loan.
4. Auto or vehicle loan
Borrowers use an Auto or vehicle loan to buy a new or used personal or commercial. When lenders offer two-wheelers it is generally called a Two-wheeler Loan, and for commercial vehicles, it is called a Commercial Vehicle Loan.
5. Small Businesses Loans
Secured business loans are available, but unsecured loans are also available. A secured business loan, for example, is an equipment loan. Assume you operate a construction company and require a new dump truck. You may pay for it with an equipment loan secured by the dump truck you want to buy. You won’t have to worry about losing the equipment you bought if you pay the loan back on time.
Some examples of unsecured loans:
1. Credit card
When a customer pays with a credit card, he or she is basically taking out a modest personal debt. No interest is levied if the debt is paid in full right away. If you don’t pay off some of your debt, interest will be charged every month.
Credit cards are quite convenient, but they need self-control to avoid overspending. Consumers are more eager to buy when they use plastic instead of cash, according to studies.
2. Flexi Loans
In this type of unsecured loan, you can avail funds from your pre-approved limit (which is generally fixed by your bank) and as when required, you can withdraw on your loan limit, any number of times and repay your amount with no extra cash, at no extra cost. This type of unique facility gives you full control of your finances, unlike rigid term loans.
Based on the Flexi facility, loans are classified mainly into:
- Education loans: This type of education loan can be taken to complete full-time, part-time, or vocational courses in the fields of medicine, management, engineering, etc. Generally, it covers the basic fees of the course along with others expenses such as accommodation, practical fee, educational tour fee, etc. In such types of loans, the student is the main borrower. The moratorium period is the unique feature of this type of loan, in which the student has the option of not paying the EMIs until completing the course.
- Vehicle loans: Sometimes, a pre-approved loan provides by your bank to help you to buy a two or four-wheeler either on purchase of a new vehicle or a used one. In such cases, credit score, the ratio of debt to income, loan tenor, etc., play a crucial role in determining the pre-approval loan amount.
There are many types of loans available depending on your financial needs. Banks offer both secured and unsecured loans. People choose secured loans because of the lower interest rates and the huge amount of money accessible, which can be utilized to buy a car or a home. Personal loans, which have a higher interest rate and are issued for lesser sums for reasons such as home improvement, are the most frequent unsecured loans.
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