Bank Loans in India

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Types of Bank Loans Offered by Banks in India

Home Loan

Home Loans are taken by people for a variety of home-related purposes such as construction of home, home renovation, home extension, buying of property or land, or payment of stamp duties. Home loans comprise an adjustable or fixed interest rate and payment terms. Some types of home loans are mentioned below:
  • Home Purchase Loan
  • Land Purchase Loan
  • Home Construction Loan
  • Home Extension Loan
  • Home Renovation Loan
  • Stamp Duty Loan
  • NRI Home Loans
  • Loan Against Property

Personal Loan

This type of loan is given to individuals after accessing their credentials based on their profession or business, or any other sources of income. The loan can be utilised for any purpose, for example, paying debt, marriage expenses or vacation expenditure. No collateral security is required for this type of loan. The span of personal loan repayment varies from 12 months to 60 months depending upon the principal amount and the EMIs. The interest rate ranges from 15 percent to 28 percent varying from bank to bank. Approximately 2 percent of the total loan amount is charged as the loan processing fee. Generally, banks rules prohibit prepayment of loan for the initial six months; otherwise 2 percent to 4 percent of the outstanding amount is charged as the prepayment fees. The EMI starts once the disbursement of loan has been made.

Business Loan

This type of loan is provided to either existing businesses or those venturing into new business. As banks provide loans on the basis of individual's credentials, it is bit difficult to get a loan for starting a business. It is very important for individuals (starting a business) to have a clear cut business plan as it is the most important requirement to convince the banks that your business has the capability of repayment. Banks then rely on individual's background, assets/property, previous loan history and dedication towards work. Banks also prefer those individuals who have already insured the property for their business. Nowadays, banks are working on providing more lucrative and easy business loans options for the first time business owners.

For existing businesses, loan is provided in the following ways:
  • Term loans – Amount provided for a fixed tenure at the applicable interest rate: three years for short term loan and 10-15 years for long term loans.
  • Bank overdraft limits – Ability to withdraw more money than what is deposited.
  • Bill Discounting – Short-term borrowing used to improve a company's working capital and cash flow position.
  • Letter of credit for international business – Bank guaranteeing of a buyer's payment to a seller in specified period.

Education Loan

Required by and provided to students who want to pursue higher education in resident country or abroad. Students should have an admission offer from an institution before they apply for an education loan. The loan takes care of the fees of the institution including examination and library fees; travel expenses for abroad; cost of books and equipments required; any insurance for the student, if applicable; and any additional expenses such as tours, thesis, project work, etc. The terms of education loans vary from bank to bank. The RBI has fixed certain norms on the total amount of loan that can be disbursed; however, banks can increase or decrease the limit depending on the institution. For studying in India, Rs. 10 lakh is the average and for studying abroad, the average is Rs. 20 lakh. For a loan amount up to Rs. 4 lakh, parents should be the joint borrowers and above that amount, a guarantee or some security in terms of tangible assets is required, depending upon the bank. Simple rate of interest is charged depending upon the base rate of the bank. It is not mandatory to pay the interest during the study period; however, if paid regularly during the study period, some concession is also provided by a few banks. The repayment tenure varies between 10 years and 15 years depending upon the loan amount and repayment begins between six months and two years of the course completion. Early repayment has no associated charges.

Gold Loan

Gold loan is imparted only on providing gold as security to a bank or any other lending institution. It is considered as one of the safest methods as the loan amount is provided on the basis of the security submitted. Amount ranging from Rs. 5k to 25 lakh can be taken as loan against gold. Amount equivalent to 80 percent to 90 percent (varying from bank to bank) of the total value of the gold is given as loan to the borrower. Depending upon the bank, the tenure of gold loan varies from one day to two years. The extension of tenure is also allowed by few banks. The rate of interest usually ranges from 14 percent to 24 percent, depending upon the financial institution. The banks charge processing fees of up to 1.5 percent. There is no prepayment fee. You can repay the gold loan any time during the tenure. EMI policy also varies from bank to bank; few banks prefer EMIs where interest and principal are charged monthly, whereas few only charge the interest on a monthly basis and offer flexibility for the payment of the interest amount.

Vehicle/ Car Loan

Compared to other loans, it is easier and simpler to take vehicle loans. Vehicle loans involve less paperwork and around three to six working days are required to get the clearance. The interest rates vary from bank to bank based on their base rate. The repayment process involves monthly EMIs and early repayment options.

Loan against Insurance Policy

Any individual having an insurance policy can take loan against it from the insurance company. The amount of loan depends upon the type and period of the policy. It is generally up to 80 percent of the surrender value of the policy. The rate of interest on loan against insurance is very less and varies with the companies. The tenure (during the policy term) and repayment options are decided by the insurer company as per their policies. The unpaid loan amount/ interest amount is adjusted to the policy amount before any payment against the policy is made.

Loan against PPF

Loan against PPF is one of the easiest and most beneficial loan options in India. The loan is disbursed easily. The loan against PPF is usually of a small amount depending upon the money in the PPF account. The rate of interest is 2 percent more than the rate of interest given for the PPF at the time when loan is taken. The loan is available from the second year of account opening, i.e., after completion of one year of account opening. The loan can be availed within five years of account opening. If five financial years have passed since the account opening, the account holder cannot apply for the loan. The repayment of the loan should be made in next 36 months, i.e., three years from the date of loan.