Sunny Jadhav
- Feb 24
- 4 min read

what is loan? 5 types of loan

Money, property, or objects borrowed by an individual/company with the commitment to repay the complete amount including the liable interest, and within a predetermined period is known as a loan. Many banks and fintech companies now offer the convenience of receiving a loan within minutes. However, many individuals end up losing significant amounts of money by selecting the wrong type of loan. It's crucial to understand that there are various types of loans, each with different characteristics and terms.

Now that we have a basic idea of what is the meaning of a loan, lets try to understand the loan terminologies and various types of loans.

What is loan tenure, principal, and interest?

Loan Tenure:

Loan tenure refers to the total time span for which the loan has been allotted to the borrower. The loan tenure commences from the day of the loan disbursement and ends on the last of the liable Equited Monthly Installment (EMI).

Principal:

The principal amount of a loan is the total money requested by the borrower in form of a loan. For example, if you take a loan of 10 lakh rupees at the interest rate of 10%. In this case, the principal amount of the loan is 10 Lakh rupees

Interest rate

The extra money charged by the lender on top of the principal amount for providing the loan facility is known as interest. Usually, lenders calculate the interest amount in terms of a percentage of the principal amount for a pre-defined time. For a Loan of 10 Lakh rupees at an 8% interest rate per annum, the extra amount to be paid by the borrower would be 80,000 rupees for the first year.

Collateral

Collaterals are nothing but the assets that you pledge for getting funds from a lending institution as a security. The collateral can be in the form of a property, gold, jwelery or other assets such as mutual funds, Fixed deposit or PPF. Usually collateral loans have a lower interest rate.

Secured/Unsecured Loan

Secured loans necessitate borrowers to provide collateral as security to the lender. With secured loans, lenders retain the right to sell the assets pledged as collateral if the borrower fails to repay the loan. Conversely, unsecured loans do not mandate collateral, resulting in higher interest rates compared to similar secured loans due to the elevated risk associated with unsecured lending.

Types of Loan

1. Personal Loan:

The personal loan facility is provided by lenders as an unsecured loan with instant disbursal. Lenders do not ask for the purpose which means you can use the funds to pay for any big purchases, home decor, marriage, education, etc. Many people use personal loans for debt consolidation (Pay off other loans with a personal loan), this helps to reduce the number of payments each month and also to reduce overall interest rate in some cases.

Personal loans also help in building a good credit score during repayment

Features:

No collateral requirement
Funds can be utilized for any purpose

Interest Rate:

10.75% to 24.00%

2. Vehicle Loan:

As the name suggests vehicle loans are provided to ease and pay money for a motorcycle or car as required by the borrower. Vehicle loan is available for new as well as used car. Such lenders take into account the credit score of the borrower, their professional experience and age. These loans are disbursed directly to your car/bike dealership company.

While applying for a vehicle loan, borower must take special care all the processing charges and pre closure charges applicable on the loan amount.

Features:

Income tax benefits are available for self employed and business owners

Interest Rate:

7.5 - 10 %

3. Home Loan:

Several banks offer home loan services covering up to 90% of a property's value. This enables borrowers to secure funds for purchasing a new home, renovating an existing property, or constructing a new house for their family. The interest rates for these loans typically fluctuate in accordance with the repo rate set by government banks. Home loans come with extended tenures, often spanning up to 25 years. The Equated Monthly Installment (EMI) of a home loan varies based on the borrower's profession type, with salaried individuals typically receiving loans at lower interest rates compared to self-employed individuals.

Features:

Income tax benefits under section 24 of Income Tax Act

Interest Rate:

8.55% to 9.10%

4. Gold Loan:

Lending institutions offer both Term Loan and Overdraft facilities for gold loans, which are secured loans allowing borrowers to access funds by pledging their jewelry or gold. These funds can be utilized for various purposes such as education, business ventures, or other expenses like weddings. Since the jewelry or gold serves as collateral, the eligible loan amount is determined based on the carat value of the pledged jewelry or gold. Typically, up to 75% of the jewelry's appraised value is provided as funds. The pledged ornaments are securely stored in a vault by the lender and may be auctioned in the event of loan repayment default.

Features:

Immediate funds approval

Interest Rate:

8.5% - 27%

5. Education Loan:

To empower students in pursuing their aspirations for high-quality education, numerous banks, NGOs, and government agencies offer education loan programs. The interest rates

for these loans vary depending on the lending institution. For instance, certain NGOs and government entities extend scholarship-cum-education loans at minimal or zero interest rates, whereas banks impose substantial interest rates based on factors such as the chosen field of study and academic performance. Opting for a secured education loan typically results in a lower interest rate. In India, Vidya Lakshmi is a portal made by goverment that allows students to find and apply to various loan offers.

Features:

Moratorium Period of 6 month to 1 year

Interest Rate:

11% to 13.05%

6. Loan against assets

Just as with gold loans, where borrowers pledge gold as collateral to access funds, banks and lending institutions offer a range of other loan options to their customers. These options allow borrowers to secure instant funds against diverse assets.

You can avail a loan against following assets: