Common Types of Loans: Interest Rates, Tax Benefits and Application Process
Most people take out a loan at least once in their lives. Whether it’s for buying a house, expanding your business, pursuing your higher education, sending your kid abroad for studies or handling medical emergencies. But before you take any loan, you must understand the various types of loans, their interest rates, tax benefits, and other components.
Before exploring the different types of loans, it is important to understand what a loan actually means.
What is a Loan?
A loan is an arrangement where a bank or financial institution provides you with money that you agree to repay over time. This repayment happens through EMIs, which include both the borrowed amount and the interest charged by the lender.
If you take a ₹10 lakh loan at 10%, you repay it every month through fixed EMIs until the total amount and interest are cleared.
Key Components of a Loan
The following are the different components that make up the loan structure:
1. Principal Amount
This is the original sum of money that the borrower receives from the lender. All interest calculations are based on this amount.
2. Interest Rate
This is the percentage charged by the lender on the principal amount. It is the cost of borrowing money and can vary based on the loan type, borrower profile, and market conditions.
3. Loan Tenure
This is the time period over which the loan must be repaid. Longer tenure usually means lower EMIs but higher total interest paid.
4. EMI (Equated Monthly Instalment)
This is the monthly payment made by the borrower to repay both the principal and the interest over time.
5. Processing Fee
Lenders often charge a one-time fee to process the loan application.
6. Collateral
This is a security or asset that the borrower pledges in case of secured loans. If the borrower defaults, the lender can recover the money by selling the collateral.
7. Prepayment and Foreclosure Charges
Some lenders charge a fee if the borrower chooses to repay the loan before the agreed-upon tenure ends.
What are the Types of Loans in India?
Loans in India are broadly classified into two categories:
1. Secured Loans
These loans are backed by collateral. This means you need to pledge an asset such as property, gold, or fixed deposits to get the loan. If you fail to repay, the lender can take possession of the pledged asset.
Types of Secured Loans:
- Home Loan
These are taken to buy, build, or renovate a house or flat. The house acts as collateral. Home loans usually have low interest rates and long repayment tenures, going up to 30 years.
- Loan Against Property (LAP)
You mortgage a residential or commercial property to raise funds. The loan can be used for business, education, or personal needs. Since the property is pledged, interest rates are lower than unsecured loans.
- Gold Loan
You deposit gold ornaments or coins with the bank and get a loan based on the gold’s value. Gold loans are easy to get, have flexible repayment options, and are commonly used in rural and semi-urban India.
- Car or Vehicle Loan
Taken to buy a new or used vehicle. The vehicle itself acts as collateral. If you fail to repay, the bank can repossess it.
- Loan Against Fixed Deposit
If you have a fixed deposit, you can get a loan against it without breaking the FD. Interest is usually 1–2% higher than the FD rate.
2. Unsecured Loans
These loans are not backed by any asset. Because there is no collateral, banks take more risk, and interest rates are higher. Approval depends mainly on your income, credit score, and repayment capacity.
Common Types of Unsecured Loans:
- Personal Loan
These are used for any personal need, e.g., medical expenses, wedding costs, travel, home repairs, etc. These are easy to get but come with higher interest rates and shorter tenures.
- Education Loan
These help students finance their higher studies in India or abroad. This type of loan is co-signed by a parent or guardian. No collateral is needed for smaller amounts, but higher education loans may require security.
- Credit Card Loan
These are offered as an instant loan on your existing credit card. Useful for short-term needs, but interest rates are among the highest.
- Business Loan
For self-employed individuals or small businesses to expand operations, buy equipment, or manage cash flow. No collateral is required for small amounts, but large loans may need financial records and business plans.
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Secured vs Unsecured Loans: How Do They Differ
Here is a basic difference between secured and unsecured loans in India!
| Feature | Secured Loan | Unsecured Loan |
| Collateral Required | Yes, assets like property or a car | No collateral needed |
| Interest Rates | Generally lower | Generally higher |
| Loan Amount | Usually higher | Usually lower |
| Approval Time | Can take longer due to asset verification | Faster approval |
| Risk to Lender | Lower, backed by collateral | Higher, no collateral |
| Risk to Borrower | Risk of losing assets in the event of default | No asset loss, but credit score affected |
What are the Types of Interest Rates?
Not all loans are the same. Each type of loan comes with its own interest rates and rules.
- Fixed Interest Rate
The rate stays the same for the entire loan period. Your EMI won’t change, so it’s easier to plan your monthly budget. Anyone who prefers fixed monthly payments and wants protection from market rate fluctuations.
- Floating Interest Rate
The rate can go up or down based on market conditions. Your EMI may increase or decrease over time. It’s riskier but can save you money if rates fall. Borrowers are comfortable with short-term fluctuations and hope to benefit from falling interest rates.
Which Loan Has Low Interest?
Home loans usually have the lowest interest rates, starting around 7.85% per year, while personal loans can go as high as 44% due to being unsecured. Additionally, gold and car loans fall in the middle, offering rates between 8%–10%.
| Loan Type | Interest Rate Range (Approx.) |
| Home Loan | 8.5% – 9.5% p.a. |
| Education Loan | 9.5% – 13.5% p.a. |
| Car Loan | 8.5% – 11.5% p.a. |
| Personal Loan | 10.5% – 18% p.a. |
| Gold Loan | 8% – 12.5% p.a. |
| Business Loan | 11% – 18% p.a. |
| Loan Against Property | 9% – 11% p.a. |
Note: Rates vary based on credit score, lender, and tenure.
Low-interest loans: Usually home loans, gold loans, or loans against property, since they are backed by collateral.
Balance your expenses wisely first so you can choose loans with manageable repayments.
Try the 50-30-20 rule of budgeting!
What are the Tax Benefits of Loans in India
Some loans help you save tax under the Income Tax Act.
- Home Loan
- Principal Repayment (Section 80C): Deduction up to ₹1.5 lakh per annum.
- Interest Payment (Section 24(b)): Deduction up to ₹2 lakh per annum for self-occupied properties.
- Deduction (Section 80EE): Up to ₹50,000 per annum for first-time homebuyers with loan amounts up to ₹35 lakh and property value up to ₹50 lakh.
- Affordable Housing (Section 80EEA): Additional deduction up to ₹1.5 lakh per annum for properties valued up to ₹45 lakh.
- Joint Home Loans: Each co-borrower can claim deductions individually under Sections 80C and 24(b).
- Education Loan
Interest Payment (Section 80E): Full deduction on interest paid for up to 8 years, applicable to loans taken for higher education in India or abroad.
- Business Loan
Interest Payment: Interest paid on business loans can be claimed as a business expense, reducing taxable income.
Old vs New Tax Regime
Tax benefits are typically available under the old tax regime.
Under the new regime, several deductions (such as 80C, 24(b), 80EE, 80EEA, and 80E) are not available. It’s advisable to consult a tax professional to determine the most beneficial option for your financial situation.
What is the Loan Process?
The loan process becomes easier once you know the steps involved.
- Check Eligibility: Review age, income, credit score, and employment documents requirements.
- Compare Lenders: Look at interest rates, fees, loan tenure, and prepayment rules before choosing one.
- Apply and Submit Documents: Submit your application along with KYC documents, income proof, and bank statements.
- Verification: The lender checks your documents and evaluates your repayment ability.
- Disbursal: After approval, the loan amount is transferred to your bank account, and your EMI cycle begins.
What is the Eligibility for a Loan in India
Banks consider several factors before giving a loan. These usually include:
- Age: Typically between 21-60 years.
- Income: A minimum monthly income as required by the lender.
- Credit Score: A score of 750 or above improves your chances of approval.
- Employment Type: Should have a stable income, whether salaried or self-employed.
- Repayment Capacity: Based on existing EMIs and fixed financial commitments.
What are the Benefits of Loans?
The following are the key advantages of loans:
- Immediate access to funds for emergencies or major expenses.
- Asset creation through home loans, car loans, or business loans.
- Credit score improvement when EMIs are paid on time.
- Flexible repayment options tailored to your income and financial stability.
How Your Credit Score Affects Loan Approval & Interest Rates
A credit score above 750 signals strong financial health to lenders. It improves your chances of loan approval because lenders see you as low-risk.
Thus, high scores let you get loans faster and at lower interest rates. This saves you money over the loan term and speeds up the approval process.
Conclusion
Understanding the different types of loans helps you choose the right option for your needs. Moreover, knowing how interest rates work, what tax benefits apply, and how eligibility is assessed ensures you make the right financial choice.
With the right information, you can make confident, well-planned borrowing decisions for long-term stability.
What are the Various Types of Loans: FAQs
Loans mainly include home loans, personal loans, car loans, education loans, and business loans. Each one helps you meet different life goals.
Loans are often classified as secured, unsecured, demand loans, and term loans. The type depends on the need and repayment terms.
There are two basic types—secured and unsecured loans. The “best” one depends on your purpose and repayment capacity.
Term loans are divided into short-term, medium-term, and long-term. The difference lies in how long you take to repay them.
CIBIL stands for Credit Information Bureau (India) Limited. It keeps your credit score, which shows how well you repay loans.
Yes, you can get a loan with a low CIBIL score, but it may be difficult. Lenders often charge higher interest rates or ask for additional security.
Home loans have the lowest interest rates in India, usually starting from 8.5%–9.5% per annum. This is because they are secured loans backed by property.
