Both salaried and self-employed individuals largely depend on loans to finance their planned or unplanned expenses. Whether it is renovating a home, financing higher education, funding a business, or dealing with an emergency, there are different types of finance loan options available in India. Understanding these loan options can help you choose the best one for your needs and financial standing. Here’s an overview.
Importance of Loans
Loans are important, as they allow you to purchase goods, achieve goals, or handle emergencies. Salaried individuals can use them for travelling or wedding-related expenses, while self-employed individuals can use them to grow their business, build working capital or purchase equipment or supplies. They are crucial for several reasons, including the following:
- Fuel Growth: Most people don’t have immediate funds or resources to grow a business. Loans allow you to achieve goals that might not have been possible with just your savings. By distributing the cost into instalments, they help you realise your dreams at affordable rates.
- Manage Cash Flow: Loans spread the cost of big-ticket purchases over EMIs, freeing up the borrower’s capital for other expenses. A Personal Loan allows you to make smaller EMIs to buy the laptop instead of depleting all your savings at once. As a result, you can maintain a healthy cash flow for day-to-day expenses.
- Economic Boost: By improving the cash flow in the economy, loans fuel economic development and growth. Increased economic activities lead to higher living standards for everyone.
Types of Loans
Basically, there are two types of finance loan options:
1. Secured Loans
Secured loans are funding options that require a security against the sanction. You must pledge an asset as security, reducing the lender’s risk. Some common types of secured loans in India include the following:
- Two-Wheeler Loans: A two-wheeler loan finances the purchase of a bike. The vehicle you purchase acts as collateral against the loan.
- Loan Against Property (LAP): A Loan Against Property lets you borrow money against the value of a property you own. If you fail to repay, the lender seizes the property to recoup the outstanding balance.
2. Unsecured Loans
Unsecured loans do not require any collateral. Lending institutions like Hero FinCorp approve these loans based on the applicant’s credit history, income, debt-to-income ratio, and overall repayment capacity. Their collateral-free nature makes them a popular choice among borrowers with no considerable assets or those who do not want to put their assets at risk.
Common types of unsecured loans include the following:
- Personal Loans: Personal loans are funding options that you can borrow for any personal use. Whether you need funds for a medical emergency, travel plan, home renovation, or debt consolidation, lending institutions approve these loans based on your income, job stability, and credit score. Some loan providers may also approve an instant loan without CIBIL, but you might need to pay a higher interest rate for such loan plans.
- Small Business Loans: Small Business Loans or SME loans are specifically tailored to meet a business’s financial needs. However, these loans are not accessible to startups. You must be an established company with a business vintage of at least five years. Some types of unsecured Business Loans include the following:
- Term Loans: A term loan provides a lump sum approval you must repay over a fixed repayment tenure. Common expenses you can cover with these loans include expanding the business, purchasing equipment or inventory, hiring staff, investing in marketing, etc.
- Working Capital Loans: Businesses use these loans to manage their day-to-day operations while maintaining liquidity. They help cover various short-term expenses in the business, like salaries and inventory.
- Bill or Invoice Discounting: If you have a bill or invoice that is due for payment, you can borrow a loan against it for immediate funding. With this loan option, you can complete large purchase orders by paying your suppliers upfront.
Things to Consider When Choosing an Appropriate Loan Option
Here are a few factors you must consider before signing on the dotted line:
Credit Score: Before applying for a loan, check your credit score and ensure it meets the lender’s minimum requirement. While your credit score influences your loan eligibility, amount, and interest rate, you can still get an instant loan without CIBIL at a higher interest rate.
Interest Rate: The interest rate determines the total loan cost. Pay due attention to the processing fees and other charges as well to calculate the cost of borrowing. A good credit score and high repayment capacity help you borrow an easy loan with low interest rates. Check different loan plans to get the best deal for your funding option.
Repayment Tenure: Repayment tenure is the time you take to repay the loan. While lending institutions offer a range of terms for repayment, you must specify the required tenure at the time of application. Once you choose the tenure, the lender distributes the total loan cost into monthly EMIs. A longer tenure means smaller EMIs, while a shorter tenure means bigger EMIs. However, the interest cost increases as you extend the tenure. Use an EMI calculator to choose a tenure with affordable EMIs.
In India, financial institutions and NBFCs offer a wide range of finance loan options to cover diverse financial requirements for individuals and businesses. Whether you need funds for a personal or business purpose, understand the different types of loans available to make an informed borrowing decision.
Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader’s discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.
