Introduction to Banking
Types of Bank Loans
In India, banks provide a wide variety of loans which can be for personal use or business use. The most common types of loans include:
- Home loans, which can be further subdivided into:
✔ Home Purchase Loan
✔ Land Purchase Loan
✔ Home Construction Loan
✔ Home Extension Loan
✔ Home Renovation Loan
✔ Stamp Duty Loan
✔ NRI Home Loans
✔ Loan Against Property
- Personal loans
- Business loans
- Education loans
- Gold loans
- Car loans
- Two-wheeler loans
- Loan against securities
- Loan against the insurance policy
- Loan against PPF
- And others.
Each bank has the liberty to design its own loan product, which has to be done following guidelines laid down by RBI. For example, Kotak Mahindra Bank’s loan products include home loans, car loans, personal loans, education loans, gold loans, loans against securities, and loans against property.
Banks can also decide the interest rate that they will charge on respective loans. However, RBI provides guidance for fixing the interest rates by publishing a guidance rate known as the ‘Base Rate’.
Let us now look at some of the most popular loan products offered by banks:
Home loans are loans where the bank finances up to a certain amount of the cost of buying a house. These are extremely beneficial for purchasing a property which might be too expensive to be paid as a lump sum by an individual customer. Home Loans have made housing affordable for customers. Banks fund up to a certain percentage of the cost of the property. This percentage of funding varies from one bank to another. Kotak Mahindra Bank finances 75% to 80% of the cost of the property. Since the principal amount is quite hefty, home loans are provided for a longer period, between 15 to 20 years. The property remains mortgaged with the bank till the time the full payment is made to the bank.
Having a car is no more a luxury today. Car loans make purchasing a car easier for customers where the bank funds a certain portion of the cost of the car. Customers can use a car loan to buy a new as well as a used car. In the case of car loans, the car remains mortgaged with the bank till the time the full payment is made to the bank.
These are loans provided by banks to meet miscellaneous requirements such as going on a vacation, wedding in the family, purchasing household electronic items, meeting emergencies in the family, and others. This is an unsecured loan that is granted solely on the repayment power of the borrower.
Higher education is quite expensive nowadays. However, education loans make it easier to fund them. Education loans are deferred loans that fund the years of education of a student, and the repayment starts after the student has secured a job. These loans are designed to help meritorious students achieve their dreams. Although education loans are primarily unsecured, banks might require some kind of mortgage such as an insurance policy.
Traditionally, Indians value gold, and usually each household owns a decent amount of the same. However, in most cases, gold lies idle in a bank locker or at home. Gold loans are a way to make the idle gold work for customers when they are in need of funds. In gold loans, the gold is mortgaged at the bank and a certain amount is given out as funding. The customer pays EMI in return and once the loan is closed, the gold is given back to the customer.
Loan against Properties
When customers are in need of funds, banks can provide loans by mortgaging properties held by customers. As in all other loans, this is also provided based on the repayment capacity of the customer. Once the loan is fully repaid, the property papers are returned back to the customer.