In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity.
From starting a business to purchasing a luxury car, buying a home to going on a vacation – these days you will find customized bank loans for all your needs. This creates a huge opportunity not only for banks but also for businesses selling consumers products. Banks label loans on the basis of end use of proceeds. Terms and conditions and other features of loans differ mainly based on this end use, i.e. the purpose of the loan.
Bank loans on the basis of end use
1.Personal loan, as the name suggests, loans received as personal could be utilized by the recipient for any requirement. For example – marriage, home improvement, travel or any miscellaneous expenses. These days’ credit card companies give you an option to apply for a loan for up to the extent of your credit limit. This is processed online where you can choose your EMI and duration of repayments and a cheque will be delivered to you within 3-4 days, no questions asked. All you need is a credit card. The interest rate is highest for this category of loan.
2.Home Loans, typically has the lowest rate of interest and is usually taken for a very long duration.
3.Car Loans, these days’ automobile companies have ventured into finance by setting up separate subsidiary companies solely for this purpose. They are able to offer the best interest rates often with zero interest rate schemes. They usually undercut any bank’s finance terms since they are able to eat into their profit margin on the underlying vehicle.
4.Education loan, just like personal loans, the rate of interest is really high for this category. However the big advantage here is that most banks will give you a grace period before your EMI’s or repayment terms start. The grace period takes into account the duration for which your education lasts i.e. repayment starts once you complete your education and get into job market.
5.Business loan, again, the interest rate is really high for this category mostly because of the risk involved.
Major Terms in Bank Loans
6.Gold Loan: Gold loan interest rates are lower as compared to personal loans and this is probably the edge. Processing fees are not charged on gold loans. However, they are charged for valuation of gold. Most of the banks and companies take utmost care not to damage the ornaments during evaluation or storage.
7.Property Loan: Loan against property is pretty similar to personal loan; the only difference being you put a property owned by you as collateral against the loan. This property might be confiscated in case you default on the loan.
Fixed Rate vs. Floating Rate Loans
Fixed Rate: The rate of interest is fixed either for the entire tenure of the loan or for a certain part of the tenure of the loan. In case of a pure fixed rate loan, the EMI remains fixed for the entire duration irrespective of whether the bank increases or reduces its interest rates and irrespective of RBI mandated changes in interest rates. If interest rates move up over the years, a fixed rate EMI becomes very attractive as you pay far lower than the market rate. Consequently a reduction in interest rates will have the opposite effect.
Floating Rate: As the name suggests, the floating rate of interest varies with market conditions. EMI of a floating rate loan changes with RBI mandated changes in interest rates (and with changes in bank’s internal interest rate) from time to time. If market rates increase, your repayment increases. When rates fall, your dues also fall.
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ISHAN LLB : Types of Bank Loans in India | By Ishan [Hindi]