A few years ago, loans were considered only a last resort in times of financial trouble. Today’s outlook has changed; loans are being availed to grow businesses, buy a home, buy a car, pursue higher education, and meet working capital requirements.
This change in the outlook toward loans has also impacted the loan products available in the market.
Moreover, the growth of the financial sector and technological developments have made the process of availing of loans easy and digital. Nowadays, we need not even go to the bank branch to avail loan. We can apply for a loan online from the comfort of our home or office. Within a few days of submitting our documents, the loan gets approved, and our loan amount is credited.
However, with this increase in ease, there is also an increased risk of financial crimes like theft.
Also Read: Loans Vs Advances: Know The Differences Between Loans And Advances
Different Types of Bank Loans
Loan In Retail Segment
- Home loans: Home loans are the loans sought to purchase a home. Home loans are secured loans, with the legal papers of the home purchased acting as security or collateral. The tenure for which home loans are availed generally is twenty years or twenty-five years. The maximum tenure for a home loan is thirty years. Applying for home loan offers, tax benefit on the interest paid on the home loan. Also, the interest rate charged on a home loan is the least among all the bank loan products. Home loan interest rate ranges from 7.2% – 14%.
- Education loans: This is the loan to pay fees for pursuing higher education. If you are qualified for a degree, adding the same to your CV would help you grab a lucrative job but are short of the funds required to pursue the same. Education loan interest rate ranges from 9.55% to 13.25% p.a
- Personal loans: These are usually unsecured loans. One can avail of personal loans for various purposes such as marriage, home renovation, vacation, medical emergencies, etc. The interest rates on personal loans are higher when compared to a secured loan product. In India, Weddings are a huge affair, and loans for wedding preparations to cover wedding expenses are prevalent. Personnel rate ranges from 10.50% to 24% p.a
- Auto loans: Loans availed for purchasing a personal vehicle like a car or a two-wheeler or any commercial vehicle. These are usually for a period of up to five years. And are at a higher interest rate as compared to the home loan. The auto loan starts at 7% p. a and varies from bank to bank.
- Consumer durable loans: Loans availed to buy durable consumer products such as washing machines, air conditioners, and refrigerators are durable consumer loans. These loans are offered at 0% – low rate of interest by most lender
- Gold loans: It is a secured loan with gold as collateral. Be it a medical emergency, wedding, or a start of a business, one can avail of gold loans for any financial need. Gold loan interest rates generally range from 11% – 26%
Also Read: Top 5 Nationalized Bank Loan Options For Women Entrepreneurs
Loan In Business Segment
- Working capital Loan – It is a collateral-free loan secured to meet day-to-day business requirements. These are usually short-term loans with a repayment tenure of up to 12 months. The interest rate offered is higher in working capital loans when compared to the interest rates offered in term loans.
- Term Loan – A loan offered for a predefined period with fixed EMI. These loans are used to purchase a fixed asset or commercial space for business or expansion of a business. Interest rates charged may be fixed or floating as per the agreement between the lender and the borrower.
- Letter of Credit – These types of loans are famous in the business where the export or import of goods from international markets is required. The business owner may not have known the supplier personally in those circumstances, where a supplier is unknown to the business owner. Banks act as an intermediary to assure the parties.
- Equipment Finance or Machinery Loan – Loans that are availed by large enterprises engaged in the manufacturing sector during business expansion or when the old equipment needs to be replaced. These loans often enjoy tax benefits as well.
- Overdraft Facility – In the course of the business, the business owners may opt for an overdraft facility from their banks. The banks offer overdraft facilities to their trusted customers based on their relationship with the customer and their credit history. To help them grow their business.
- Point-of-Sale Loans– Small business owners often experience liquidity crunch in short runs. To avoid such situations, POS loans are opted by the merchants. The interest rate on POS loans is usually higher. The repayment facility is linked to the point-of-sale machine installed.
- Loans under the Government Schemes – The government of India often comes with various schemes to pace up the growth of the economy. These schemes offer loans to women entrepreneurs, MSMEs, and individuals engaged in trading, manufacturing, and service to start or expand their businesses at discounted interest rates.
- Agricultural Loan – These loans are ideal for farmers. They require funds for day-to-day farming activities or purchasing equipment necessary for farming.
Also Read: The Advantages of Debt Financing For Your Business
Eligibility Criteria for Bank Loans
The eligibility criteria may vary based on the type of loan sought. However, some of the eligibility criteria that apply to almost all loans are:
- Credit score above 700
- Regular Income
- The age of the applicant must be between 21 and 60 years.
- Resident of India
And for secured bank loans, the asset kept as a security should be of the same or higher value than the loan amount.
Documents Required To Apply For The Bank Loan
- PAN card
- Residential Proof
- Bank account statement for the last six months
- Form 16
- Self-employed and business owners
- PAN card
- Residential proof
- Bank account statement for the previous six months
- Evidence of business
- Returns of income tax
- Documents in case of secured loan
- In addition to the above-listed documents, in the case of secured loans. Original papers of the asset that serves as the collateral are required.
Also Read: Reasons Why Unsecured Business Loans Are A Perfect Choice For Businesses
In short, there are various types of bank loans available for different needs. Although, there is no harm in opting for the loan when we have some unexpected funds requirements. However, before availing of a loan, we need to ascertain that we can pay the loan back over time, or we may end up screwing our credit score.
Bank Loan FAQs
Does applying for a bank loan impact my credit score?
Yes, applying for a bank loan impacts your credit score as it counts as a hard credit inquiry. It is advisable to only apply for a loan when you need funds for some purpose. Avoid applying for a loan just to check eligibility.
2. Does prepayment of a loan attract penalties?
Before applying for a loan, read the terms and conditions of lending laid down by the lender, as there may be charges for prepayment of the loan. And also, when applying for a loan, check the information in the application form regarding the prepayment guidelines. And the interest rate that will be charged.
3. Do banks charge processing fees For processing loan applications?
It depends from bank to bank. At times, banks may waive off processing fees.