Anupama Nair
www.mediaeyenews.com
Loans can be used for many purposes, from funding for a new business to buying your fiancée an engagement ring. However, with the different types of loans available, we need to decide, which is the best and for what purpose we need the loan? The option most people choose is one with a lower interest rates. There are two types of loan – secured and unsecured.
An unsecured loan is a loan that doesn't require any type of collateral. Instead of relying on a borrower's assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness. Examples of unsecured loans include personal loans, student loans, and credit cards.
Secured loans are loans in which a borrower pledges some type of asset as collateral for the loan. The pledged assets increase the lender’s ‘security’ for providing the loan. Examples of secured loans include mortgages, car loans, LIC loans and gold loans.
As unsecured loans require higher credit scores than secured loans, in some instances lenders will allow loan applicants with insufficient credit to provide a cosigner or co borrower and sometimes guarantors. A cosigner has the legal obligation to fulfill a debt if the borrower defaults. This occurs when a borrower fails to repay the interest and principal payments of a loan or debt.
If a borrower defaults on a secured loan, the lender can repossess the collateral to recoup the losses. In contrast, if a borrower defaults on an unsecured loan, the lender cannot claim any property, however the lender can take other actions, such as commissioning a collection agency to collect the debt or taking the borrower to court. If the court rules in the lender’s favor, the borrower’s wages may be garnished. A lien can be placed on the borrower’s home (if they own one), or the borrower may be otherwise ordered to pay the debt. Defaults effect a borrower’s credit worthiness.
The types of Secured Loans are:
Home Loan:
Owning a house is the dream of many. However, buying a house needs a lot of money and it is almost impossible for a middle-class family to pay the money to buy a house. Banks now offer home loans that can assist you in purchasing a property. A home loan can be of different types such as:
- Loan for constructing a house
- Loan for repairing and re-modeling your existing home
- Loan for purchasing a land
Gold Loan
Among all the types of loans available in India, the fastest and easiest one to get is the gold loan. It is also the most popular when the rates of gold were rising exponentially. Gold companies are facing losses due to falling rates of gold in the recent times.
Auto Loan
The vehicle loans is the easiest way to fulfil your dream of owning a car or bike. Almost all banks provide this type of loan. It a secured loan means if the borrower doesn’t pay the instalments in time, the bank has the right to take back the vehicle.
Agriculture Loan
Most banks in India have multiple loan schemes to assist farmers and their needs. The benefit these loans have is their very low interest rates and also help farmers to buy seeds, equipment for farming like tractors, insecticides etc. and all that is needed to generate a better yield. The repayment of the loan can be made after the harvesting and selling of crops.
Overdraft
Overdraft Loan is a process where the customers can withdraw more money than the balance in their accounts. This facility is given to mostly people who have salary account in the bank.
Loan against Life Insurance Policy
If you have an insurance policy, you can easily get loan on it. Only those insurance policies that are three years or more are eligible for such loans. The insurer themselves offer a loan amount on your insurance policy. Approaching the bank for the same is optional. You need to submit all the documents related to the insurance policy to the bank.
Loan against Fixed Deposits and Mutual Funds or Shares
If you have a fixed deposit in with a bank, you can apply for a loan against deposit. If the FD is around or more Rs. 100,000, you can apply for a loan of Rs. 80,000. The rate of interest levied on such a loan is comparatively higher than that paid by the bank on your FD. These days most people offer their mutual fund investment or shares as a collateral for their loan application. The banks give out loans of an amount lesser than the total valuation of the shares or mutual fund investment. The amount is lesser because the bank can then charge rate of interest if the borrower is unable to repay the amount.
Unsecured Loans:
Unsecured Loans based on composition fall into two major categories:
Revolving Loans:
A revolving loan is a loan with a credit limit, implying the maximum sum of money/maximum aggregate capital which can be withdrawn by a borrower at any given time, i.e., 1 month, 3 months and any such specified time period. The borrower can repay the amount either partly or fully in between and then withdraw again within the specified limit. After the specified period ends, the borrower has to refund the amount and any interest applicable on the withdrawn amount. Revolving loan provides flexibility and ease of procuring funds and are offered at a variable rate of interest. For instance, credit cards and overdraft are popular examples of a revolving loan.
Personal Loans:
In a personal loan, the borrower receives a lump sum amount, which needs to be repaid in fixed instalments, as per the loan agreement till the end of the loan tenure. Borrowers prefer such loans for their long-term investment or purchase of fixed assets. Terms loans normally have fixed interest rates. Personal loans is mostly taken for home renovation, wedding, vacations, to pay debts or for medical reasons. This is the most popular type of unsecured.
So, all you need to do is decide the type of loan you need.
