Loans are essentially capital borrowed from a bank or financial institution. These institutions take an interest in lending for a certain period of time. For some, bank loans are a way to deal with emergencies, while for others, loans act as a growth catalyst. It all depends on the purpose and type of loans that the borrower has availed.
There are different types of bank loans available that a borrower can access. There are two different types of loans that borrowers can avail of from lending institutions in India: i) Secured Loans ii) Unsecured loans
Here we will discuss about the Secured loans that borrowers can avail of from the lending institutions.
Home Loans
These are the most commonly used types of secured loans by borrowers. As the name suggests, home loans are taken for the purchase or construction of a home by the borrower. The home itself acts as security for the lender. However, while the home is the primary security, depending on the borrower’s profile and the valuation of the home, the lender may also require the borrower to provide security. This can either be a fixed-term deposit or another asset. Home loans are long-term loans and the loan tenure can range from 10 to 25 years. These are usually high-priced loans worth several hundred thousand euros and also the cheapest. Home loan interest rates start anywhere between 7% per annum and 7.5% per annum. The loan has to be repaid in Equated Monthly Installments (EMIs). The loan-to-value (LTV) ratio is usually 80%. This means that the borrower can take out a loan of up to 80% of the property value. Check more
Gold Loans
Gold loans are taken against the gold owned by the borrower. Gold acts as security for the lender, allowing the borrower to pledge the gold to the lender and receive money from them. The lender keeps the gold until the loan is repaid. The gold loan interest rate starts at 7.50% per annum. Most lenders require borrowers to only pay interest on the loan amount each month. The borrower can repay the principal amount and repossess the gold at any time. Interest must be paid on the outstanding capital every month until the capital is repaid. Furthermore, the LTV for gold loans can be up to 90%.
Gold loans are taken against the gold owned by the borrower. Gold acts as security for the lender, allowing the borrower to pledge the gold to the lender and receive money from them. The lender keeps the gold until the loan is repaid. The gold loan interest rate starts at 7.50% per annum. Most lenders require borrowers to only pay interest on the loan amount each month. The borrower can repay the principal amount and repossess the gold at any time. Interest must be paid on the outstanding capital every month until the capital is repaid. Furthermore, the LTV for gold loans can be up to 90%. Check more
Vehicle Loans
These are loans taken out to purchase the vehicle. Vehicles can include passenger cars and commercial vehicles as well as two-wheelers, four-wheelers and heavy vehicles. The vehicle acts as primary security for the lender. If the loan is not repaid, the lender can seize the vehicle. The interest rate on vehicle loans can start from 7% per annum to 7.5% per annum. The LTV depends on the vehicle type. For certain vehicle loans, the lender may even offer a loan of up to 100% of the vehicle’s value.
Loan against Property (LAP)
This is a type of mortgage loan in which the borrower can obtain funds by pledging his property to the lender with a mortgage. A real estate loan can be used for both residential and commercial properties. Property loan management fees are higher than home loans. The funds can be used by the lender for both business and personal purposes. The LTV on a home loan can range between 65% and 70%. Furthermore, interest rates on home loans are also slightly higher compared to those on home loans. The interest rate here starts at 8% per year. read more
Loan against Securities
Investors often invest in stocks and securities. These can include stocks, mutual funds, bonds and notes. Investors have the right to borrow money from banks and financial institutions for these securities. However, because the securities are inherently volatile, the LTV for loans against securities is 50% of the security’s value. This is to protect the lender from downside risks due to a decline in the value of the security. In addition, the interest rate on securities loans varies depending on the type of security. It can start anywhere between 7.50% per year.
Title Loans
With title loans, the lender provides borrowers with credit against their vehicle. Borrowers can borrow up to 25% to 50% of the value of their vehicle by giving their vehicles to lenders as security. While ownership of the vehicle remains with the borrower, the lender can seize the vehicle in the event of late payment. These loans are usually ultra-short-term loans that can be availed for a period of just 30 days. One of the biggest disadvantages of title loans is that the interest rate is very high. The interest rate is usually 25% per month. That means it’s 300% per year.
Non-recourse Loans
Non-recourse loans are secured loans in which the borrower can offer the lender security for borrowing the funds. If the borrower defaults on payment, the lender has the right to seize the security. However, one of the key features of a non-recourse loan is that the lender cannot take action against the borrower if the security does not provide full compensation to the lender. The lender therefore waives the remaining amount of the loan after collecting the security. The borrower has no personal obligation to repay the non-recourse loan. The LTV on a non-recourse loan can range from 60% to 80%.
Loan against Fixed Deposits
Banks and financial institutions provide borrowers with loans in exchange for fixed deposits. The fixed-term deposits serve as primary security for the lender. Since the fixed deposit corresponds to money, banks do not face major risks when lending against FD. Borrowers can avail loans against FD up to 60% to 75% of the FD value. When it comes to interest rates, some banks charge a flat interest rate while other banks may charge interest 1% to 2% more than the FD interest rate. Currently, the FD rate ranges between 5% and 7.5% per annum depending on the amount and tenure. Therefore, it can be said that loans against FD are among the cheapest secured loans.
Loan against Insurance
Insurance loans are also one of the most popular secured loans in India. Many people have life insurance policies but rarely realize that the policies can serve as collateral against which to borrow money. To qualify for a loan against an insurance policy, the policy must have a surrender value. The LTV for loans against insurance is between 85% and 90% per year. The interest rate in this case can be between 10% and 12% per year.
Working Capital Loans
Working capital loans are provided by banks and financial institutions to help businesses meet their working capital needs. Also known as a cash loan, the amount of loan that can be availed depends on the company’s creditors, debtors and shares, which also constitute the company’s working capital. Each credit institution has its own method of calculating the working capital limit. Additionally, the interest rate for working capital loans can start at 12% per annum. While the shares and debtors serve as security for working capital loans, the credit institution can also require the borrower to provide security. Check more
Summary
In India, secured loans offer borrowers a variety of options tailored to their specific needs, each requiring collateral to mitigate the lender’s risk. Home loans, commonly used for purchasing or constructing houses, use the home itself as collateral and offer long tenures up to 25 years with competitive interest rates starting around 7%. Gold loans allow borrowers to pledge gold, offering flexibility in repayment and interest rates starting from 7.5%. Vehicle loans finance the purchase of various vehicles, with the vehicle itself as collateral. Loans against property, shares, fixed deposits, and insurance policies provide significant funds by leveraging the value of these assets, with varying interest rates and loan-to-value ratios. Title loans, though short-term, come with high interest rates, and non-recourse loans limit the borrower’s liability to the collateral only. Working capital loans help businesses manage day-to-day operations, secured against business assets. These diverse options make secured loans a viable choice for various financial needs in India.
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