Loans in IndiaFinance » Loans
A loan is an arrangement in which a borrower takes money from a lender or a financial institution and promises to return it within a fixed period of time and at a fixed rate of interest, which is determined at the time the loan is granted. In most of the cases, a loan is returned in fixed installments and each installment is a fixed amount of money.
There are various types of loans. Some of them can be classified as follows:
Secured and Unsecured Loans
- Secured Loan: A secured loan is one in which you get loan against an asset that you possess. For example, you can take a loan against your property, a vehicle that you own, your jewelry etc. If by any chance you are unable to pay back the money you have taken as loan, the financial institution will sell that asset and recover the amount. The interest rates may be lower for secured loans as compared to unsecured loans. The financial institution from which you take a secured loan usually estimates the market value of the asset you keep as security.
- Unsecured: If you do not have an asset to keep as security, you can get an unsecured loan. However, in order to qualify for this loan you would have to have a good record of credit history and have a good income. The interest rates for unsecured loans are usually higher as compared to secured loans.
Subsidized and Unsubsidized loans
It you are granted a loan as part of your financial aid, you might be eligible for subsidized or unsubsidized loans, or can avail both.
- Subsidized loans are awarded to those who qualify for it and the borrowers are not charged any rate of interest. In India, the best example of subsidized loans are those given by rural banks or cooperative banks to the farmers, especially for the purchase of farm equipments like tractors, pumps etc, or to implement latest technology that would increase their produce. Some countries provide subsidized loans to students to pursue their studies.
- Unsubsidized loans are given to lenders at a fixed rate of interest till the time the full amount is repaid. The interest rates charged on this type of loan can be minimized by repaying the loan before the interest accumulates.
Open-Ended and Closed-Ended Loans
- Open-Ended loans are loans in which you can take loans several times. You can pay the loan and take a loan again. You have a credit limit for these loans. This means that you cannot take loan against an amount fixed by your lender. You need to pay interest on these loans only if you exceed the credit limit or you pay after the date of maturity. The credit limit can be increased by the lender if you have a good record and do not default in payments. Credit cards and lines of credit are a good example of open-ended loans.
- Closed-Ended loans are loans that are fixed at the time you take them. This means that when you take this loan, the amount of installments to be paid, whether it has to monthly or half yearly etc., the duration till when you have to repay the loans are fixed by the lender when you take this loan. These loans are given against an agreed rate of interest. If you want, you can repay the installments before the term alloted for it. Some examples of open-ended loans are car loans, mortgage loans student loans.
Demand Loans: These are short term loans and have to be paid by the borrower at any time it is asked to be repaid to the lender. Unlike other types of loans, this loan does not have a date of maturity and at times may not have specific schedule for repaying the loan. These loans are at times said as 'call loan' and are given by lenders to borrowers with whom they have long standing business relationship. This loan is good for the borrowers as they can repay it it according to their convenience.
Banks are the chief providers of loans in the country. But before you take a loan from a bank, make sure that you are aware of the various types of loans that you can avail and also know the rates of interest offered by various banks. Loans can be further categorized; however, this would depend on whether the borrower is an individual or an organization that wants to take loan for a business transaction.