Other Types of Loan

Education loans

Higher education from reputable institutes can be quite expensive – be it in India or abroad. Education loans have been designed to give students the opportunity to pursue their dreams. In an education loan, the student is the main borrower while their parents, spouse or siblings remain the co-applicants. Banks may or may not ask for collateral while extending education loans. 

Education loans have a typical moratorium period in the sense that students don’t have to pay the EMI while taking the loan. The repayment starts only after 12 months of completing the course or 6 months after the student starts working, whichever is earlier. 

• Education loans can be taken for undergraduate, postgraduate and even vocational courses. 
• Education loans can be availed for studying in India or abroad.
• Various aspects are taken into account while disbursing education loans such as family income, the type of programme pursued and the reputation of the institute where the course is pursued. 

Loan against fixed deposits: 

These loans are provided keeping fixed deposits as collateral. A certain percentage of the total fixed deposit amount, typically 80%, is given out as a loan. The interest rate of the loans is dependent on the interest rates of the fixed deposits. In India, almost all banks extend loans against fixed deposits. These are secured loans where fixed deposits remain as collateral. In case the borrower defaults on the payment, the fixed deposits are liquidated and the amount is recovered.

Credit Cards

Credit cards are a form of loan where banks or NBFCs grant a credit facility to the borrower. The limit can be used by the borrower to make purchases. At the end of the billing cycle (which lasts for 1 month), a bill is generated with an outstanding amount. The borrower then has to pay back the billed amount to the credit card issuing authority. The payment for the credit card has to be made monthly. However, the borrower does not have to necessarily pay the entire billed amount in a month, provided he/she pays the minimum amount which is 5% of the total amount billed for the month.

• Credit cards entail some of the highest interest rates because they are completely unsecured. The limit is solely granted on a person’s financial health and history. 
• Credit cards are the most popular and convenient form of credit available today. They can be used in India and abroad and is especially useful while travelling abroad because it eliminates the need to carry large amounts of foreign exchange. They also come with reward points and various other benefits, which add to their popularity. 
• The credit limit can be used interest free if all the bills are paid in full. However, if the bills are not paid on time or in full, then the interest starts getting applied. 
• A word of caution: since credit cards entail very high-interest rates, it is advisable to pay the monthly bills on time. Piling up a credit card debt can be a huge menace to one’s financial planning and can lead him to a debt trap easily. 
• Apart from the credit limit, every credit card usually has a cash advance facility. The user can withdraw cash from the credit card through an ATM. However, this is highly risky and should be used only as a last resort.

Being an electronic card, credit cards are often compared to debit cards. Debit cards are electronic cards too, but they are tied to your bank account. Hence, when you use credit cards, you effectively use the balance in your bank account. It is not a line of credit and hence does not incur any interest charges. 

Let us compare the two and understand which one is better to use:

1. Debit Cards

What is it?

It is equivalent to spending cash. You can use the money in your bank account. 

How much money can you spend?

Only the money in your bank account

Pros

• Convenient 
• Efficient usage of cash
• Keeps track of your spending 

Cons

• Not possible to spend more than your bank balance
• Risk of losing money if the debit card is lost. 
• It does not improve your credit score.
• If the spending and the repayments are managed efficiently, credit cards can be much more advantageous than debit cards. 

2. Credit Cards

What is it?

A credit line extended by the banks/NBFCs. You have to pay interest on usage. 

How much money can you spend?

Equivalent to your total credit limit. 

Pros

• It helps build a credit score.
• It helps you manage your finances. 
• Take benefits of reward points. 
• Useful for financing spending when you are short in cash

Cons

• It can lead to a debt trap
• It may lead to a high amount of interest payments if bills are not paid on time.
• It can ruin your credit history if credit card debt is not handled efficiently. 

Loan against securities

These loans are provided keeping financial securities as collateral – such as insurance policies, mutual funds, shares, national savings certificate, Kisan Vikas Patra, gold deposit certificates, bonds, non-convertible debentures and others. A percentage of the value of the securities is given out as a loan. The interest rate and tenure vary depending on the type of financial security. 

Loan against insurance policies is provided keeping certain kinds of insurance policies as collateral. These loans are provided only against those policies which have a maturity value. For example, endowment policies and money-back policies. Insurance policies have to be at least 3-years old to be eligible for these loans. While certain banks offer such loans, the insurer themselves offer loans on these insurance policies. 

Certain lenders offer loans against mutual funds and shares. The present value of the mutual funds or shares is taken into account while determining the loan amount.

Consumer durables loan

Certain consumer durable products have become more of a necessity than a luxury. Isn’t it? From mobile phones to air conditioners, consumer durables are a part and parcel of every household’s life. Consumer durable loans help families purchase these electronic products and in turn, manage their finances. Instead of dishing out a chunk of cash for such purchases, consumer durable loans can be used. It is possible to take a loan for as low as Rs 5,000. Usually, no collateral is required for these loans. Many lenders offer these loans at 0% interest rates and with minimal documentation and instant approvals.

Agricultural loans

These kinds of loans have been specifically designed for farmers to meet their general and day-to-day agricultural requirements. They can be taken for shorter time periods to meet working capital needs or longer time periods to buy agricultural equipment. 

Agricultural loans usually have very low-interest rates and help farmers obtain better yields. The loans can be repaid after selling the crops.