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What are the different types of loans?


Loan is kind of debt. Here borrower borrows money from the lender and promises to repay the money within a particular time period along with interest. The borrowed money is called as principal. Borrower has to repay the debt at regular installments or at partial payments. Here the interest charged is the profit for the lender.

Two important categories of loan

There are two important types of loans such as;

  • Secured loan
  • Unsecured Loan

Secured loan

Under secured loans the borrower pledges his private property as collateral or security for the loan. Collateral can be anything such as house property, car, Land, Gold, LIC Bonds et. Secured loan keeps the lender secured, and if the borrower defaults then the property pledged by the borrower will be acquired by lender to get back the money owed. In case the borrower does not have the property to pledge as security then he can have a third person as security for the loan provided that person should be a salaried employee or should own property.

Examples of secured Loans

  • Home Loan
  • Personal loan
  • Business Loan
  • Vehicle Loan
  • Gold Loan

Unsecured Loan

In this category there will be no assets or property of the borrower kept as collateral for the loan.

- Credit cards
- Overdrafts etc

Types of loan

Below given diagram will help you in understanding different types of loans.

Home Loan

Home loan is a kind of secured loan. It is usually borrowed for the purchase of new property or for the renovation of existing home.

Home loan rates of different Banks (As on Aug 22rd, 2009)

Personal Loan

Personal loan is a kind of loan taken for personal purposes such as spending over a ceremony, Holiday tours, Building House or renovating existing one, buying household items, buying home interiors, etc. Tenure of the personal loan varies from 1-3 yrs depending upon the banks.

Personal Loan rates of different banks (As on 2 Aug, 2009)

Car/Auto Loans

These loans are meant for the purchase of the new vehicle which may be a two wheeler or a 4 wheeler. Tenure of the auto loans varies from 3-5 years depending upon the requirements.

Car loan rates of different Banks (As on Aug 22nd, 2009)

Educational Loan

Educational Loan is a loan meant for the higher education. These types of loans are given to students to help them in higher studies. Apart from tuition fee, education loan also meets the needs of books, Hostel fee etc. The only disadvantage of education loan is higher interest rate. Education loan is very easier to get and no security is needed.

Education loan rates of different Banks (As on 22nd Aug, 2009)

Business Loans

Business Loans are given to start a new business. This loan can be taken as secured loan as well as unsecured loan. In later case a proper business plan and revenue plan should be submitted to the bank authority along with other basic requirements. And depending upon the type and feasibility of the business, loans will be granted.

Commercial Loan

This loan is for the small and medium sized business. Only if the financial position of the borrower is stable then the loan is given. Other conditions like the borrower should have considerable amount of investment in the business and it is also important that he should submit the proof of his investment in the business.

Advantages of taking a loan

  • Taking loan is a legal way of saving taxes on income.
  • For a business it’s always advisable to have a mixer of loans and equities in its capital structure which would reduce huge tax on income.
  • Loan can fulfill ones necessities and requirements.
  • Hugh money could be obtained at once which would not possible for small salaried employees.
  • It helps in setting up new business ventures and also helps the already existing business.

Disadvantages of taking a loan

  • Hugh interest has to be paid on loans.
  • Borrower may lose his property pledged if at he fails to repay the money.
  • Borrower would be under risk over a longer period.
  • Amount repaid would be much more than what you borrowed.

Points to be remembered before taking a loan

In many banks today we can find floating rate loan as a default option. It means that interest on your loan increases or decreases depending upon the variation in interest rates prevailing in the industry. It is advisable to ask the lender whether the interest rate is fixed for the entire tenure of the loan because the company reserves the right to change the interest rate on loans so in such cases if there is an increase in interest rate then the borrower has to pay much more than estimated earlier. There are some points to be kept in mind while approaching a bank for loan.

  • While taking a loan it is advisable to go for fixed rate loans.
  • It is desirable to know the rate of interest and type of interest of the loan.
  • It is always good to take short term loans as they carry lower interest rates.
  • Details about hidden charges and pre-payment penalties should be known.
  • It is not preferred to go for a personal loan when it is meant for small purchases or for buying household items.
  • Enquire about service charges, administrative charges and processing fee.
  • Enquiring about the takeover charges by the lender is required.
  • Reading the loan agreement before signing is mandatory.

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