Loans are usually the first thing that comes to mind when one needs to borrow money. However, there are numerous types of loans in the market, making it difficult to decide on the best one for your requirements. Whether you’re going to purchase a home, begin a business venture, or just need money to cover an emergency, understanding the various types of loans can assist you in making the best choices. So, let’s demystify the most prevalent types of loans and when you would need to use them.
Personal Loans
Personal loans are most likely the most convenient form of loan available. You can spend them on virtually anything—medical bills, remodeling your home, a vacation, or even to consolidate debt. Personal loans tend to be unsecured, which means you won’t have to pledge any collateral. However, because of that, the rates may be more expensive, particularly if your credit history isn’t good.
Tip: Negotiate better interest rates if you have a good credit score. Also, shop around for offers from several lenders before signing on the dotted line.
Home Loans (Housing Loans)
Purchasing a house is a big achievement, and most of us require a home loan to do so. The loans are secured against the property itself, which generally makes them cheaper than personal loans. You can opt for fixed or floating interest rates depending on your financial condition.
Novel Perspective: A lot of banks these days have ‘step-up’ repayment schemes in home loans. That means you pay smaller EMIs at first, which get bigger over time because your income is supposed to rise. It is particularly beneficial for young working professionals who anticipate their incomes to rise in the coming years.
Car Loans (Auto Loans)
Car loans are simple—they finance the purchase of a new or old car. Just like home loans, the purchased car is kept as collateral. But keep in mind that automobiles depreciate at a fast pace, and therefore, if payments are defaulted on, you will lose the automobile, which would not be able to pay back the remaining part of the loan.
Pro Tip: Certain banks have special electric vehicle schemes for lower interest and longer repayment plans.
Education Loans (Student Loans)
Education loans are a blessing for students who wish to study further but do not have the resources to do so. Education loans pay for tuition fees, living expenses, books, and other education-related charges. The majority of education loans provide a moratorium period, i.e., you begin repaying only after finishing your course.
New Idea: Many lenders are now offering ‘income-linked’ repayment options. Here, your EMIs are based on your post-education income, ensuring you’re not overburdened when you’re just starting your career.
Business Loans
If you want to start or grow your business, business loans are the best bet. Business loans can be applied for different uses like buying machinery, handling working capital, or expanding operations. You can apply for secured or unsecured business loans depending on your needs.
Tip for Entrepreneurs: Opt for government schemes such as Mudra Loans or Startup India loans, which have reduced interest rates and relaxed terms for small enterprises and start-ups.
Gold Loans
Gold loans are well-liked in India, particularly during financial crises. You can pawn your gold ornaments and avail of a loan based on the current market price. The interest rate is comparatively lower, and the loaning process is easy and fast.
Interesting Insight: Since gold prices tend to go up over a period of time, this loan can be an ideal choice when you require money without parting with your precious assets.
Payday Loans (Short-term Loans)
These are for situations where you require cash instantly but can pay it back in a short time. Payday loans carry very high interest and are typically borrowed for a brief period—until your next salary, which is why they are called so.
Warning: These loans can trap you in debt if not handled carefully. If you are unable to repay on time, you may have to pay more interest than the original loan amount.
Loans Against Property (Mortgage Loans)
These are collateral loans where you use your property as collateral to obtain a loan. The loan amount will be based on the value of your property. These loans come in handy for big expenses such as financing a business or meeting medical emergencies.
Pro Tip: This loan tends to have a longer tenure, which can reduce the EMIs.
Credit Card Loans
When you are in a hurry for cash, there are some credit cards that enable you to convert your credit limit into a loan. Although this is handy, the interest rates will be high, and you will find yourself in a debt trap if not used wisely.
Evade the Trap: If you have to take a credit card loan, make it a point to repay it early to shun high-interest charges.
Agricultural Loans
For farmers, agricultural loans can be used to buy seeds, machinery, and other farm-related costs. Government schemes provide these loans at subsidized interest rates to promote the agricultural industry.
Good to Know: Look at the Kisan Credit Card (KCC) scheme, which provides low-cost loans to farmers with easy repayment terms.
Final Thoughts
Selecting the correct loan type is based on your personal requirements, your personal finances, and your ability to pay back. Always research thoroughly, read between the lines, and compare offers before you commit. And lastly, remember that a loan is not simply obtaining cash at the time of need—it is also about maintaining your finances prudently in order to minimize future hassles.
